Deposit Rate Cuts Tough For Banks As Govt Retains Small Savings Rates

‘The government’s decision to keep interest rates unchanged on small savings schemes will certainly constrain banks’ ability to cut deposit rates further.’

Illustration: Uttam Ghosh/Rediff

Banks may find themselves in a bind when it comes to reducing interest rates on deposits, as the government has retained interest rates for a dozen small savings schemes, including the Public Provident Fund (PPF), Sukanya Samriddhi Yojana, and others, for the March quarter. This comes as deposit mobilisation has been tough.

The government has said it will keep small savings rates unchanged for the January-March 2026 quarter.

The PPF will continue to offer 7.1 per cent, the Post Office Savings Account 4 per cent, Sukanya Samriddhi Yojana 8.2 per cent, and the three-year term deposit 7.1 per cent.

The National Savings Certificate (NSC) will remain at 7.7 per cent, the Kisan Vikas Patra (KVP) at 7.5 per cent with a maturity of 115 months, and the five-year Post Office Monthly Income Scheme at 7.4 per cent.

The rates have remained unchanged for eight straight quarters, even as the Reserve Bank of India has cut the repo rate by 125 basis points (bps) since February last year.

In response to the rate cut, banks had reduced their weighted average lending rate (WALR) on fresh rupee loans by 69 bps during February-October 2025.

The interest rate effect was 78 bps. WALR on outstanding rupee loans moderated by 63 bps over the same period.

On the deposit side, the weighted average domestic term deposit rate (WADTDR) on fresh deposits declined by 105 bps, while the rate on outstanding deposits softened by 32 bps.

Post the 25 bps cut by RBI’s Monetary Policy Committee (MPC) in December, some large banks, including State Bank of India and HDFC Bank, have reduced deposit rates on select tenors, bringing their peak deposit rate down to 6.45 per cent from 6.66 per cent.

Bankers said it would be very difficult for them to cut deposit rates further, unless there is adequate liquidity in the system, and even then there is limited room for additional reductions.

This is because doing so would risk reducing the attractiveness of deposits at a time when alternative assets are offering higher returns.

“The government’s decision to keep interest rates unchanged on small savings schemes will certainly constrain banks’ ability to cut deposit rates further. That said, it is important to note that these are distinct products, and fixed deposits — despite offering lower rates — provide greater flexibility and features compared to government savings schemes,” said Harsh Dugar, Executive Director, Federal Bank.

“Any further reduction in deposit rates will depend on liquidity conditions and the interest rates offered by competing investment products. While deposit rates could still move lower, the extent of any cut will be determined by these broader factors,” Dugar added.

Lenders are already feeling deposit tightness as deposit growth has slowed down to 9.35 per cent year-on-year (Y-o-Y) as per RBI’s latest figures, while credit growth has risen to nearly 12 per cent, increasing the credit-deposit growth gap by over 260 bps.

Things on the margin front also look tough. As loan assets reprice quickly following RBI rate revisions, while deposits adjust with a lag, margins tend to come under pressure.

Banks saw margin compression in the first and second quarters of the current financial year and were hoping for stabilisation in the third quarter.

However, the RBI’s 25 bps rate cut has pushed the possibility of meaningful margin recovery into the next financial year.

“The decision to keep rates on small savings schemes unchanged will factor into banks’ assessment of their deposit rates and whether there is room for further revision. That said, small savings schemes are largely targeted at lower-income segments in semi-urban and rural areas, making their customer base quite distinct from that of banks,” said Madan Sabnavis, chief economist, Bank of Baroda.

At present, banks are facing greater competition from capital markets when it comes to attracting household savings, according to him.

“As a result, while small savings schemes remain a consideration, they are a secondary one; the primary competition is from mutual funds and equity markets,” Sabnavis said.

Ultimately, each bank will determine its deposit rate strategy based on its credit growth ambitions and net interest margin (NIM) outlook, he added.

With deposit tightness persisting in the system, the certificate of deposit (CD) market has been notably buoyant in recent times.

Banks have stepped up borrowing through CDs, raising over ₹50,000 crore via this route in each of the last three fortnights. 

Feature Presentation: Rajesh Alva/Rediff