Rate Cut Roils 2.52 Bn Old, Poor
By Shivaji Sarkar
As the “Trumpire” strikes with aggressive tariff moves to assert American dominance, India must resist the urge to mimic Washington. Caving to the US pressure risks derailing the country’s swadeshi push for self-reliance and manufacturing strength.
Meanwhile, the latest 0.25 per cent rate cut, second since February—cheered by corporates, following an earlier US rate cut—delivers a blow to middle-class savers and the aspiring poor, eroding the real returns on their hard-earned deposits. It shears them of their own hard-earned money as accrual reduces drastically. It was avoidable but the Reserve Bank in its wisdom did not put it off. The inflation scenario is not so bright as resort to a cut that deprives 2.52 billion, including 917.7 million women, individual bank accounts, billions of rupees of accrual a year.
They are potential purchasers, travelers, tourists, businessmen and contributors to the growth. The RBI’s lowering of GDP growth rate to 6.5 per cent is a pointer that the move may not have been wise. The US President Donald Trump pausing retaliatory tariff for 90 days, including India, amid 125 per cent tariffs on China and retaliatory moves by the European Union indicate that global unease continues.
India wants to placate it with increased gold and precious metal imports from the US to address Washington’s concern of a significant trade deficit. Nobody has yet questioned the RBI’s wisdom of such fancy imports. The RBI gold buying spree along with some other central banks have skyrocketed world gold prices. The new buys are used for settling trade deals, but the surging prices add to the cost.
RBI Governor Sanjay Malhotra says more than inflation, he is concerned about US tariffs on growth. The tariffs, he says could impact growth in three ways – by creating uncertainty that “dampens growth by affecting investment and spending decisions; denting global growth and leaving a negative impact on exports”. Hard days are indeed ahead.
Indian consumers are also fobbed by not getting the benefit of international crude oil prices slump as the selling prices are maintained by administrative price mechanism. A relief in retail petroleum selling prices and cut in excessive highway and other toll rates could have boosted the Indian economy.
Brent and West Texas Intermediate (WTI) crude prices have plunged to their lowest levels in four years, each tumbling 16 per cent in just a week. The sharp slide follows China’s retaliatory move slapping an 84 per cent tariff on U.S. oil, countering Washington’s aggressive 104 per cent hike. Brent now trades at $60.35 a barrel, while WTI has dropped to $57.23, after a steep midweek 7 per cent fall.
The State Bank of India (SBI) observes that term deposit rates are impacted in a much stronger way than lending rates. This starts to compress the net interest margins for banks, a kind of no-man’s-land indicator that could signal at least two broader trends. One is what’s happening on the funding side. Since term deposits are generally less liquid than demand deposits and there is still a healthy growth in demand deposits, banks could be moving towards a structure where they pay less for the funds they are using to make loans.
As fixed deposit rates are expected to fall even more in the coming months, analysts suggest that investors should take the time to secure high-yield rates. Once the security of the deposit and its accruals are hit, billions of people lose confidence and move away from the market. In real terms, except for February vegetable prices, inflation is not that low. There are apprehensions that future interest rate cuts are on the horizon. It further shakes the investors and banks may not have comfortable sources of funding.
Over the past two months, the RBI has cut the repo rate by a cumulative 50 basis points—a clear shift in policy, despite subdued inflation and fragile growth. This is welcome news for borrowers, easing access to credit and lowering repayment costs. However, the outlook isn’t as bright for fixed deposit (FD) holders.
In response to the rate cut, banks have begun adjusting their deposit schemes. Kotak Mahindra Bank was the first to act, reducing FD rates by up to 15 basis points across select tenures. As of April 9, 2025, the bank offers interest rates ranging from 2.75 to 7.30 per cent for the general public and 3.25 to 7.80 per cent for senior citizens on long term deposit.
Deposit interest rates likely to decline across banks, prompting investors to act before further cuts. It translates into the savers moving away from banks and dampening the corporate enthusiasm as funds become scarce. If that happens, despite rate cuts, actual lending rates could soar.
The falling rupee adds to the woes making imports expensive. Rupee fell 42 paisa to Rs 86.68 to dollar on April 9, hitting a three-week low amid trade tensions and RBI rate cut. Bond yields rose, and traders expect further rupee pressure as tariff concerns mount.
Senior citizens and others reliant on fixed incomes are feeling the squeeze as banks slash fixed deposit rates in response to the RBI’s easing stance. Once a haven for stable returns, FDs are losing their edge. The HDFC Bank has axed its high-interest offerings of up to 7.40 per cent for long-term deposits. Bandhan Bank, Yes Bank, and Equitas Small Finance Bank have followed suit, trimming rates across tenures.
Savings—historically sticky and making up 30 per cent of deposits—have so far muted the full impact of policy rate cuts. But with current and savings account, CASA in banking terms, deposits falling and liquidity pressure mounting, on banks, for managing liquidity, even these may not stay immune for long, according to SBI.
After previous 25 basic point cuts in February, weighted average term deposit declined from 6.56 per cent in January to 6.48 per cent in February. Weighted average lending rate dropped from 9.86 per cent to 9.78 per cent.
In the current global context, key challenges stem from underfunded global risks such as climate change, food insecurity, and pandemics; inadequate attention to debt vulnerability and restructuring; increasing reliance on the bank for global growth; insufficient resource mobilization for transformative investments; and the near absence of the private sector, which was expected to be a major driver of change. India must redo its economic policy to have an independent path for progress. — INFA