3 Reasons Why Bank FD Rates Will Go Further Down

While the RBI's bi-monthly monetary policy outcome for FY20 delivered on February 6, 2020 maintained key repo rates steady at 5.15%, it took to cutting interest rates in the system through some of the novel measures announced. And even as borrowers stand to benefit from the move through reduction in lending rates as funding cost for banks will go down, it shall not be in the interest of retail bank depositors who park their funds for a medium term of between one and three years.

We believe the RBI has managed to deliver implicit easing without actually cutting the policy rate", Sonal Varma, economist at Nomura, is quoted as saying in a leading business daily.

Here we will detail on RBI's steps that would nudge banks to reduce interest rates on deposits further down:

LTRO or long term repo operations: As part of its LTRO exercise, the RBI will open a window of Rs. 1 lakh crore and provide finance at policy rate of 5.15% for 1 year and 3 years. This is lower than prevalent market rates for 1-3 year term and hence medium term borrowing through this facility should reduce cost of funds for banks. But the move will simultaneously nudge banks to reduce rates on deposits with tenure of 1-3 years.

On the rationale for the new LTRO measure, the apex bank said it has been introduced after Operation Twist for pushing transmission of earlier rate cuts and hence enable better monetary policy transmission. Also, it is to assure banks of availability of liquidity at a reasonable price compared to market rates.

In this regard, the Reserve Bank of India on Friday said that it will carry out 3-year LTROs with an amount of Rs. 25000 crore on February 17, and another 1-year LTROs with a notified amount of Rs. 25000 crore on February 24.

The move is also expected to boost the demand and investment in corporate bonds and hence is an attempt to manage bond yields.

Relief to real estate is another big boost: In its MPC meet, the RBI has decided to permit extension of date of commencement of commercial operations (DCCO) of project loans for commercial real estate, delayed for reasons beyond the control of promoters. So, if the delay is for genuine reasons, there shall be no downgrade of commercial realty loans. "Allowing one year extension for project loans from real estate sector will allow developers to complete the project and financiers not to classify it as NPA", said Piyush Gupta, MD, Capital Markets India, Colliers International.

Increased flow of funds to certain sectors due to CRR waiver: As per the latest policy statement, banks will be incentivized for increasing their lending to some of the sectors, wherein fresh loans to MSME, home loans and vehicle loans shall be exempted from CRR or cash reserve ratio calculation. The move will loosen up some of the reserves of the bank for lending and help in reviving demand across these sectors. The waiver for 6-months is expected to push flow of funds across these sectors.

On expected lines, SBI just a day after February's MPC statement reduced FD rates across several tenures in the range of 0.1-0.5%. The new rates will come into effect from February 10, 2020. So, 1-10 year FD at SBI now would fetch 6% interest rate in contrast to 6.1% per annum.

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