From November 1, the country's largest lender will reduce the interest rate on retail savings accounts by 25 basis points (bps). SBI announced yesterday that in view of the adequate liquidity in the system, savings accounts with balance up to Rs 1 lakh will earn 3.25 per cent interest from next month, down from 3.5 per cent currently.
SBI's announcement spells bad news for smaller depositors since other banks are likely to follow suit. It's happened before. In 2017, the last time the bank tinkered with this rate - pruning it down by 50 bps from 4 per cent - most large banks including Axis Bank, HDFC Bank, PNB, Bank of Baroda and ICICI Bank were quick to announce similar rate cuts.
Only a few players like Kotak Mahindra Bank, Yes Bank and RBL Bank opted to offer higher interest rates on savings accounts in order to woo customers. This time round fewer banks are likely to buck the trend given that the recent switch to repo-linked loans is putting pressure on margins. Last month, the RBI made it mandatory for all banks to link their new floating personal, MSMEs or retail loans to key repo rates or external benchmarks with effect from October 1.
Compounding the bad news for depositors, SBI also slashed its retail term deposits rates by 10 bps to 6.4 per cent for the one year-to-under-two years tenor. Bulk deposits of the same tenor now earn 6 per cent interest, down from 6.3 per cent till yesterday.
Small depositors beware
Given the inflationary trends in the economy, small depositors have cause for concern. The RBI's September 2019 round of inflation expectations survey indicates that households expect inflation to rise by 40 bps over a three-month ahead horizon and 20 bps over a one-year horizon, possibly responding adaptively to the rise in food prices in recent months. The Monetary Policy Committee stated earlier this month that the CPI inflation projection was revised slightly upwards to 3.4 per cent for Q2FY20, while that for the second half of the fiscal is maintained at 3.5-3.7 per cent. This means that the customers of SBI, which controls a fifth of the system, will hardly earn any real returns on their parked money.
The deal for large depositors
In May, SBI linked its large savings deposits rates to the RBI's repo rate, offering 2.75 per cent below the repo rate on savings account deposits with balance of over Rs 1 lakh. But the minimum interest rate was capped at 3 per cent for the entire balance, offering some relief to large depositors in the falling rate cycle.