Banks cut interest rates in the aftermath of demonetisation

State Bank of India along with some private banks has cut the interest rates on deposits. SBI has cut the interest rates on deposits from 1 year to 455 days to 6.90%. This may not be in the interest of those who are depositing their money in banks. The yields on 10-year government bond which is considered as the benchmark of the prevalent rate in the economy got reduced more than 25 basis points.

It is to be noted that high-value notes make up to Rs 14.1 lakh crore of the cash in circulation. Due to the de-monetisation drive, a substantial portion of the notes is coming back to the banks. This has increased the deposit base massively. The deposits are being invested in bonds. It has been observed that the bond yields and bank lending rates have a direct relationship.This will create more demand for government bonds and other high-rated bonds and the yields would fall. As bond prices rise, the yield falls.  The liquidity conditions is expected to force the banks to further lower interest rates.

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