On Monday, Kotak Mahindra Bank (KMB) lowered the savings account interest rate (SA) to 1 Lakh by 25 basis points (bps) to 3.5%. This is the second lender’s cut in the savings rate in several months and brings the interest rate on savings accounts on par with the much larger Punjab National Bank (PNB).
The lowest savings rate in the banking system currently offered is State Bank of India (SBI) at 2.75%. Deposits with HDFC Bank, ICICI Bank and Baroda Bank (BoB) deliver slightly more returns at 3.25%.
Private banks have been particularly quick to reduce deposit rates. In a report dated May 13, Motilal Oswal Financial Services, citing RBI data, said that with sharp cuts in retail prices and time deposits, the weighted average cost of term deposits (WATDR) for private banks is subject to a 15 basis point controlled between March and April, As for public sector banks, they decreased by 5 basis points during the same period. “KMB reduced its SA rate by 125-150 bps to 3.75-4.5%,” the same report said without specifying a time period.
The price cuts follow two consecutive reductions in the repo rate of up to 115 basis points between March 27 and May 22. More recently, banks have rushed to reduce deposit rates after the reductions in repo as part of their loan book now linked to repo. Since all of the retail and small business loans that have been offered since October 1, 2019, are measured according to the repo rate, they instantly earn the benefit of a lower repo rate. Thus, banks must balance their margins by reducing deposit rates.
