Banks unlikely to reduce deposit rates this month

Deposit rates may not fall this month even if the Reserve Bank of India (RBI) cuts the repo rate by 25 basis points in its mid-quarter review on March 19. This is because banks are in the midst of attaining deposit growth targets at the end of the financial year.

Repo rate is the rate at which RBI lends money to banks. One basis point is one-hundredth of a percentage point.

According to analysts' estimates, banks have cut deposit rates by 75-100 basis points in the current financial year. But in the fourth quarter (January-March), a few banks increased their deposit rates in the range of 25-50 basis points in a bid to attract deposits. Early this month, State Bank of India, the country's largest lender, raised rates by 25 basis points on domestic deposits above one year maturity. In 2012-13, RBI has cut the repo rate by 75 basis points in two tranches.

The deposit growth projection for the banking system for the current financial year is 15 per cent. "The cut in deposit rates will vary from bank to bank. If there is a cut in repo rate on March 19, then banks may not go for a cut in deposit rates because it is the fiscal-end and the requirement for funds is higher. Banks may cut deposit rates in April," said Ram Sangapure, general manager, Central Bank of India.

RBI data shows that for the fortnight ended February 22, deposits of the banking system grew 12.73 per cent to Rs 65.6 lakh crore. During the fortnight, the growth dropped 0.15 per cent from Rs 65.7 lakh crore earlier.

By the end of September, the street expects a further cut in the repo rate by 25 basis points, which would result in deposit rates falling. "I expect a repo rate cut of 50 basis points by September 30. Banks may pass on this cut by cutting deposit rates. If inflation comes down, then banks will be able to attract deposits despite the cut in deposit rates," said A Prasanna, chief economist, ICICI Securities Primary Dealership.

In the first quarter of the financial year, credit growth normally slows down due to which banks are in a position to cut deposit rates. The first quarter is also a time when liquidity in the system is quite comfortable, thus making it an ideal situation for cutting deposit rates.

"Deposit rates are a function of liquidity and inflation. We would consider the inflation and liquidity in the system before reducing deposit rates," said R K Bansal, executive director, IDBI Bank.

But some economists are of the view that deposit rates may not fall in line with repo rate cuts.

"Deposit rates may not fall at the same pace like the repo rate as there is a shortage of deposits in relation to the credit. We may see some softening in deposit rates. At the most, deposit rates will soften by a further 25 basis points if there are repo rate cuts of 50 basis points," said Abheek Barua, chief economist, HDFC Bank.