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 2lakh will earn interest in tandem with the repo rate.
Deposits of up to Rs1 lakh will earn an interest of 3.50%, while that over Rs1 lakh, but under Rs2 lakh will earn 3.25%, an official statement said.
The repo rate, which has been reduced by 1.10% in 2019, is at 5.40% at present.
Lenders have been so far against adopting an external benchmark for pricing their loans because the bulk of their deposits are not so linked.
Banks have been reluctant to link to external benchmark because they feel it is not the way to achieve policy transmission of interest rates. However, the RBI has finally decided to force banks to link floating rates to external benchmark.