Hi everyone,

Welcome to the 165th edition of The Pattern, a weekly newsletter where we dive into the latest from the world of economy, technology and finance. Let’s get right into it!

The RBI slashed the repo rate by 100 basis points in February, then in April and most recently in June. In the latest move, it trimmed another 50 basis points to 5.5% and cut the Cash Reserve Ratio to 3% from 4%, injecting ₹2.5 lakh crore into the system.

On paper, this is a remarkable move: cheaper loans, more liquidity, and hopefully, a boost to consumption. Home buyers, car dealers, and retail lending felt the victory close.

But this move has made a particular segment nervous: the average Indian who values savings, regularly checking for any interest they may have earned.

According to the latest RBI bulletin, savings deposit rates of some public sector banks have been at a historical low since their deregulation in 2011.

The fall in deposit rates has been sharp, with fresh term deposits dropping by 51 basis points and outstanding deposits slipping by 2 basis points between February and May 2025. Public sector banks have gone further than their private counterparts in cutting rates.

The logic is simple: banks slashed lending rates to spur credit, and to balance the books, they've trimmed deposit rates too.

The magnitude of the ripple

This brings us to the real problem. Lower savings rates hurt traditional savers, particularly pensioners, senior citizens, and middle-income families. When inflation is around 5 to 6%, savings account returns barely keep up, so every rupee kept in the bank loses a bit of its real value.

This wave has also hit another segment of depositors: fixed deposit (FD) investors. As banks begin to adapt to the repo rate cut, FD interest rates are likely to decline further in the coming months. For savers who depend on fixed deposits for predictable returns, this creates a dilemma.

The good news? There's still a window to act.

There are still some

offering 8% or more. Locking in those rates now could shield investors from the coming slide. Another strategy is to lean toward medium to long-term FDs. Short-term rates tend to fall faster, so longer tenures can help secure higher returns for a more extended period.

Scrambling for safe havens As bank deposit rates sink, small savings schemes will gain more traction. Government-backed instruments like the Senior Citizen Savings Scheme, Public Provident Fund, still offer returns of 7 to 7.5%. This difference motivates depositors to withdraw their money from banks and invest it in options that offer higher returns.

For banks, this shift comes bearing bad news. As PSBs depend heavily on savings and current account deposits, if customers withdraw money, these banks will need to find other sources of funds. The problem? These other sources will not come cheap.

The crisis

This puts profitability under the scanner. Low-cost deposits are the cornerstone of a bank's net interest margin. If banks are forced to raise funds from expensive sources, their margins shrink. For PSBs, which already operate on thinner spreads than their private peers, this had a deep impact. It means less room to grow credit, slower expansion, and shrinking profits. In other words, the short-term relief to borrowers could turn into a long-term headache for banks' financial health.

So, what happens next?

This is not a doomsday scenario, but it is a stress test for policymakers and banks. For PSBs, the challenge is to retain depositor trust in an era of ultra-low rates. Customers today have more choices than ever, from small savings schemes to mutual funds, even though it's a bit risky. The shift to alternatives will encourage more savers to make the switch.

For RBI, the balancing act of pushing rates has destabilised household savings behaviour. If they hold back, they risk slowing credit growth. The economy is on a tightrope where the stakes are too high.

Rate cuts make headlines, but their side effects run deeper. Low savings rates may look like a necessary price for growth, but if they push deposits out of the banking system, they undermine the very credit cycle these cuts were meant to revive. And is the risk that RBI and banks are ready to take?

That's a wrap for this week! As always, leaving you with a few reads to explore. Have a great weekend!

Reading List:

1. Public sector banks can transfer unclaimed shares, bond redemption amounts to IEPF from Aug 1

2. Liquidity coverage ratio rises with retail deposit surge, fall in bulk, corp flows

3. RBI unlikely to re-introduce fixed-rate liquidity operations: Sources

4. Bank credit growth to industry slows to 5.5% in June: RBI data

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on X here and follow FinBox on LinkedIn to always get all updates.

Cheers,

Mayank