RBI Rate Cut May Not Lower Bank Deposit Costs, Says PhillipCapital Report
In a recent report, PhillipCapital, a financial management company, highlighted that even if the Reserve Bank of India (RBI) announces a rate cut, deposit costs in the banking system are expected to remain high. This is due to the current high credit-to-deposit ratio, which makes deposit rates “sticky” and slower to adjust.
The report explains that a cut in the repo rate would not immediately lead to lower deposit rates. It also suggests that the margins for Indian banks are expected to moderate over the financial years FY24-26 due to the anticipated decline in interest rates. The relationship between interest rates and banks’ net interest margins (NIMs) shows that declining rates tend to reduce margins, while rising rates have the opposite effect.
One of the main factors contributing to this expected moderation is the high credit-to-deposit ratio in the Indian banking system, which has kept deposit costs elevated. Therefore, a reduction in the repo rate is not expected to trigger an immediate drop in deposit rates.
The report also suggested that a 50 basis points (bps) cut in the repo rate is being factored in while forecasting margins for FY25 and FY26. However, despite this reduction, the high credit demand compared to available deposits could limit the impact of any rate cuts on deposit costs. As a result, the profitability of banks, reflected in their net interest margins, may face downward pressure during this period.
Overall, Indian banks will likely experience a moderation in margins, even as borrowing costs potentially decline, as the cost of deposits remains relatively high and slow to adjust.
Doubts Revealed
RBI -: RBI stands for the Reserve Bank of India, which is the central bank of India. It manages the country’s currency and monetary policy.
Rate Cut -: A rate cut means the central bank, like the RBI, lowers the interest rate at which it lends money to commercial banks. This can influence the interest rates that banks offer to customers.
PhillipCapital -: PhillipCapital is a financial services company that provides investment and financial advice. They create reports to help people understand financial trends.
Credit-to-Deposit Ratio -: The credit-to-deposit ratio is a measure of how much a bank lends out compared to the deposits it has. A high ratio means banks are lending a lot compared to their deposits.
Sticky -: In this context, ‘sticky’ means that deposit rates do not change quickly or easily, even if other interest rates change.
Margins -: Margins in banking refer to the difference between the interest banks earn on loans and the interest they pay on deposits. It’s a measure of profitability.
FY24-26 -: FY24-26 refers to the financial years 2024 to 2026. A financial year is a year as reckoned for taxing or accounting purposes.
Basis Points -: A basis point is a unit of measure used in finance to describe the percentage change in interest rates. One basis point is equal to 0.01%.
Repo Rate -: The repo rate is the rate at which the RBI lends money to commercial banks. It influences the interest rates in the economy.