Fixed deposit rates drop to all-time low

FD rates

Interest rates on fixed deposits offered by various banks have been falling as the financial system is flush with liquidity.

The term deposit rates of all the scheduled commercial banks have plummeted to all-time low of 6% by the end of June, a dip of 55 basis points in the current calendar year.

At the end of December 2019, the average term deposit rates across the banking system stood at 6.55%, the historical data on interest rates available with the Reserve Bank of India (RBI) shows.

The biggest slump in the deposit rates came in the month of April as they fell to 6.07%, a downward revision of 31 basis points in a month from 6.38% in the month of March 2020.

In the month of June, for which RBI released the data in the first week of August, the public-sector banks were giving interest rate of 6.05% on term deposits, while foreign banks a paltry 4.05%.

On the contrary, private banks, that see immense competition, are attracting higher deposits as they are offering relatively higher interest rate of 6.15%.

According to analysts, this is because the banks are flush with funds and higher interest on deposits in a downward interest scenario would mean a pressure on net interest margin of the banks.

With reduced traction in GDP growth towards the end of second half of FY ‘20 followed by systemic disturbances due to Covid-19, the credit growth in the banking system has reduced to almost half of the levels prevailing in the earlier year, analysts say.

“This is due to risk aversion in the banking system and weak credit demand. The deposit growth is at a similar level. This has led to reduction in Credit to Deposit ratio to below 73% from 76% a year earlier, thereby leading to surplus liquidity in the system. Surplus liquidity has led to reduction in interest rates for both deposits and credit by banks and is likely to continue till we see substantial uptick in credit demand/growth,” said Sanjay Agarwal – Senior Director, CARE Ratings.

However, for borrowers, a category that has become scarce due to prevailing economic uncertainty, the lending rates also stand at an all-time low.

In fact, in April, the weighted average lending rates on existing rupee loans had gone into the single-digit mark for the first time in the history.