Federal Bank to link savings deposit rate to external benchmarks

The south-based Federal Bank on Saturday announced that it will link its savings deposit rate to external benchmarks, becoming the first private sector lender to initiate such a move. The Reserve Bank of India has been cajoling banks to move their interest rates to external benchmarks like its repo rate, at which it lends to the system, in order to faster transmission of its policy actions.

The Federal Bank said from September 1 its savings deposits up to Rs 2 lakh will earn interest in tandem with the repo rate. At present levels, deposits of up to Rs 1 lakh will earn an interest of 3.50 percent, while the same of over Rs 1 lakh, but under Rs 2 lakh will earn 3.25 percent, an official statement said.

The repo rate, which has been reduced by 1.10 percent in 2019 to boost growth, stands at 5.40 percent at present. It can be noted that re-pricing of the deposit rates is generally considered to be the first step towards the adoption of the same on the lending side.

The private sector lenders have been so far apprehensive about adopting an external benchmark for pricing their loans. The third-largest lender in the space, Axis Bank, has also said the external benchmark is not the only way to achieve policy transmission and opined that a shift holds more relevance to corporate borrowers which get repriced soon rather than the retail ones.