As banks start slashing lending rates, deposit rates could be next: Here is what savers could do now

Borrowers rejoice. At least four banks have reduced their lending rates over the weekend; the move follows the Reserve Bank of India's monetary policy committee slashing the policy repo rate by a surprising 50 basis points to 5.50 per cent from 6.50 per cent while also announcing it would cut the cash reserve ratio of banks by 100 basis points over four tranches in coming months.

However, deposit holders must also brace themselves for lower returns as banks adjust their interest rates. 

Announcing the cut in the repo rate as well as the CRR on Friday, RBI Governor Sanjay Malhotra stressed the need for effective transmission of interest rates.

Public sector lender Bank of Baroda has now reduced its repo-linked lending rate by 50 bps to 8.15 per cent from 8.65 per cent, effective Saturday. Most banks now offer such loans that are linked to external benchmarks like the repo, and these loans see faster transmission when the RBI revises the repo rate.

Comparatively, loans linked to the older regime like MCLR (marginal cost of funds-based lending rate) typically see a slower transmission as the interest rate there depends on the asset and liability situation of the individual bank. 

Like the Bank of Baroda, the Bank of India has cut its RBLR (repo-based lending rate) to 8.35 per cent from 8.85 per cent on Friday. Rival Punjab National Bank, too, has slashed its repo-linked lending rate by 50 bps to 8.35 per cent, effective Monday.

UCO Bank's repo-linked lending rate has come down to 8.30 per cent from 8.80 per cent, also effective Monday. Notably, UCO Bank has also reduced its MCLR-based lending rate for various tenors by 10 bps, effective Tuesday. India's largest private sector lender, too, has reduced its MCLR by 10 bps. 

Lower interest rates will certainly spell good news for borrowers, and the expectation is lower rates will give credit demand a boost in the coming months. A cut in lending rates will pressure the net interest margins of banks. So, as banks start cutting lending rates, they will also, over time, adjust their deposit rates downwards.

Soumya Kanti Ghosh, the group chief economic adviser at State Bank of India, pointed out that since February 2025, interest rates on fixed deposits (FD) have already been reduced by 30-70 bps. 

"Transmission to deposits rates is expected to be strong in the coming quarters with further rate cuts in deposits expected from banks," he said.

Vishal Goenka, the co-founder of IndiaBonds.com, says FD rates will come down sharply as banks transmit the repo rate cut. 

So, what is the best way ahead for savers?

After the 50 basis points cut last week and the 25 bps cut each in February and April monetary policy committee meetings, the RBI has now signalled that there is very limited scope for further rate cuts. Many economists now don't see the MPC cutting rates in the next couple of meetings. However, there is still a possibility of another 25 bps cut in December, and there could be more should the global economy deteriorate. 

If you are still keen on parking money in bank deposits, you may want to lock in the funds in longer-duration FDs. Locking funds for the long-term at current interest rates will help cushion any future cut in interest rates. 

Alternatively, you could also explore parking money in debt funds or bonds. 

"Investors should look at 2-3 year corporate bonds for their portfolio as they continue to offer good spreads over government and FD rates, and interest rates will come down more gradually for corporate bonds", said Goenka.

Puneet Pal, the head of fixed income at PGIM India Mutual Fund, opines that the 10-year bond yield is likely to trade in a range of 6.0-6.5 per cent over the next six months. He feels investors with a 12-18 month investment horizon can look at corporate bond funds. Investors with a horizon of 6-12 months could consider money market funds.