Bad news for FD investors: SBI, Kotak HDFC slash deposit rates

Fixed deposit investors, beware. The government's decision to abolish Rs. 500 and Rs. 1,000 notes and replace them with new currency notes to crack down on black money may spell bad news for fixed deposit investors.

With crores of cash pouring into banks everyday, some banks have sought to cut deposit rates. Banks need to reduce their deposit rates in order to pass on the benefits of Reserve Bank of India rate cuts, amounting to 175 bps since January 2015, to borrowers. So while borrowers can avail cheaper loans, fixed deposits will turn unattractive.

The high-value notes made up Rs 14.1 lakh crore of the cash in circulation. If a substantial portion of that comes back to the banks, there will be a massive spike in deposit base.This will bring down the cost of funds for banks. The lenders are trying to figure out where to put the cash. Therefore, the deposits are being invested in bonds, leading to a spike in the prices of the papers.

How this works:

The demonetisation of big currency notes will lead to more money being deposited in savings and current accounts of commercial banks. Higher bank deposits will put downward pressure on bank fixed deposit rates as credit growth in the economy is yet to pick up. Corporate FDs may give higher returns, but risks are attached to it.

For the watchful investor, here are some banks that have already slashed interest rates on Fixed Deposits:

State Bank of India

SBI slashed the interest rate on its fixed deposits (FDs) on select maturities by up to 0.15 per cent. Term deposit of 1 year to 455 days has been reduced by 0.15 per cent to 6.90 per cent from 7.05 per cent effective on Thursday. Its 5-year interest rate on FDs is 130 bps lower than the 5-year post office term deposit rate. The interest rate difference between the small savings products and bank FDs has been steadily increasing. Besides, the one of 456 days to less than 2 years also gets cheaper to 6.95 per cent from 7.10 per cent. The interest rate on 1-year FD is now at 7.05%, compared to 7.15% earlier. The proposed rates of interest shall be made applicable to fresh deposits and renewals of maturing deposits. SBI’s rate cut is an indicator that the deposit and lending rates are set to fall further in the banking industry.

Kotak Mahindra Bank

Private-sector lender Kotak Mahindra Bank has reduced the interest rate on one-year fixed deposits (FDs) by 25 basis points (bps) to 7%, lower than 7.05% offered by the State Bank of India (SBI) on deposits of the same tenure. The new rate came into effect on Monday. Kotak has also reduced rates on two- and three-year deposits by 50 bps each to 6.75%.

HDFC Bank

HDFC Bank has reduced the interest rate on one-year fixed deposits by 25 basis points (bps) to 7%, lower than the 7.05% offered by the State Bank of India (SBI) on deposits of the same tenure. HDFC Bank has also slashed rates on its two-year and three-year fixed deposits by 25 bps each to 7%.

ICICI Bank, Axis Bank and Punjab National Bank continue to hold rates on one-, two- and three-year deposits at 7.25%