Cash deposits at banks are swelling up in the wake of demonetisation of currency notes. For India’s largest bank, State Bank of India, it has meant Rs 1.26 lakh crore in cash deposits in just eight days, from November 10 to November 17.
With the credit offtake remaining weak, the impact of rising deposits is already evident on fixed deposit rates. SBI has this week cut fixed deposit rates by up to 50 basis points, depending on the maturity of deposit and type of deposit, retail or bulk.The next move could be a cut in lending rates from India’s largest bank.
“Depending on the cost of funds, there is every possibility that rates may come down from December 1,” said Rajnish Kumar, managing director-national banking at SBI.
SBI’s asset liability management committee will meet next week to decide on lending rates, Mr Kumar added.Private sector bank Axis Bank has already this week announced a cut in lending rate.
There could be further lowering of lending rates in the horizon as expectations build up for a rate cut from the Reserve Bank of India next month.
“Earlier I was expecting a rate cut in February,” said Ashish Vaidya, head of trading at DBS Bank. “But now I expect a rate cut in December given that the demonetisation move is fiscal and inflation positive.”
Short-term rates have also slumped, with bulk deposit rates down by as much as 42 basis points, reinforcing the view that the Reserve Bank of India may cut the repo rate in December, instead of earlier expectations for a cut in February or April.
The RBI, which has already lowered rates by 175 basis points since early last year, holds its next review on December 7.Global brokerage firm CLSA expects three rate cuts from the RBI in next 12 months.
Rajeev Malik, senior economist at CLSA, said demonetisation could have a deflationary impact on the Indian economy but it could pave the way for more RBI rate cuts. He expects the central bank to cut repo rate three times in the next 12 months, including one in December.
“People are underestimating as to how aggressive the RBI will be” in cutting rates, Mr Malik said.With bank deposits swelling, analysts also expect banks to pass on the RBI rate cuts at a faster pace than the lenders have done in the past.
