Banks likely to hold deposit rates till liquidity improves

RBI's stance key to revision in rates

Interest rates on retail term deposits may stay at current levels, or even inch up, in April as bankers are unlikely to revise them taking into account the tight liquidity conditions and the central bank’s monetary stance.

Typically, banks increase interest rates to build high deposit base towards the end of the financial year. These rate hikes are rolled back as the year-end pressure fades. But the situation is different this year with higher liquidity deficit and likelihood of reduction in policy rates by the Reserve Bank of India (RBI) on account of inflation risks.

Daily bank borrowings from RBI’s liquidity adjustment facility (LAF) was Rs 1.95-1.63 lakh crore since the start of this week. It was less than half that amount in the corresponding period last financial year. Liquidity deficit is thrice the RBI’s comfort level (one per cent of net demand and time liabilities) despite reduction in cash reserve ratio by 125 basis points since January 2012.

“Liquidity may improve to some extent in April on redemptions and government spending; but it will largely stay in the deficit mode. This may not allow banks to cut deposit rates immediately,” said a senior treasury official of a public sector bank.

According to RBI data, deposit growth fell to four-month low level of 13.7 per cent in the first reporting fortnight of March, reflecting the unattractiveness of rates offered by banks. The interest rates for small savings schemes and public provident fund are now on par with rates offered by banks on fixed deposits. Moreover, bankers said their products need to compete with the tax saving investment options, like bonds, too.

India’s largest lender, the State Bank of India increased rates on the shorter end of the curve recently. For a deposit of up to Rs 15 lakh and maturing between seven days to less than a year — except for 180 days where it offers seven per cent, SBI now offers eight per cent. The bank will also pay a premium of 100 basis points for deposits of more than Rs 15 lakh but less than Rs 1 crore. For a 180-days tenure, the premium will be 200 basis points.

Senior SBI official said bank would prefer low-cost retail deposits instead of raising high-cost bulk deposits. Presently, banks are issuing certificates of deposits (CDs) maturing in three months at rates above 11 per cent.

CDs are debt instruments issued by banks to raise funds of up to one-year maturities.

RBI is expected to cut policy rates on April 17 when the central bank announces the annual monetary and credit policy for 2012-13. While RBI said in its mid-term policy review that future actions will be towards monetary easing, it also pointed out that the timing and pace will depend on inflationary trends. Policy rate has been held at 8.5 per cent since October 2011 citing upward inflation risks.