Federal Bank Too Cuts Interest On Savings Account By 25 Basis Points

Federal Bank has become the fourth private sector bank to cut interest rate on savings account since the Reserve Bank of India slashed repo rate.

The private sector bank has cut savings account rate by 25 basis points to 2.75%, with effect from Thursday, according to the bank's website. For deposits up to Rs 50 lakh, the interest rate will now be 2.75% per year.

Savings account balances between Rs 50 lakh and Rs 5 crore will fetch 3.50% interest annually and those between Rs 5 crore and 50 crore will attract 5.25% rate of interest.

For deposits that are lower than Rs 3 crore, the bank has also revised tenures by reducing them to 11, as against previous options of 15 tenures.

For a period between one year and 443 days, the revised rates are 7% from 7.50%.

So far, HDFC Bank, Axis Bank and ICICI Bank have cut interest rates on their savings accounts by 25 bps to 2.75%. Other banks are also likely to follow suit, analysts believe.

This has come as several banks are lowering their deposit rates for better policy rate transmission. So far, State Bank of India, Kotak Mahindra Bank, Bank of India, and YES Bank have cut deposit rates.

Last week, the Reserve Bank of India's Monetary Policy Committee cut the repo rate by 25 basis points to 6.00%.

The reason why most private sector banks are scrambling to cut interest rate on savings account is that they stand to benefit on the margin front.

Most private sector bank loans are linked to external benchmark lending rates, which helps during an interest rate easing cycle.

While depositors will earn less interest on their savings account, lowering deposit rates will help banks as it reduces their cost of funds and boost margins.