Cut in deposit rates will bring down bond yields: RBI

Rising bond yields might not come down if banks did not cut their deposit rates further, Reserve Bank of India's Deputy Governor KC Chakrabarty said on Wednesday.

“Banks are paying 8 per cent on deposits. You cannot ask your dealer to take deposits at 8 per cent and deploy at 7 per cent,” Chakrabarty said on the sidelines of a banking seminar organised by Indian Banks' Association (IBA) and the Federation of Indian Chambers of Commerce and Industry (Ficci) here on Wednesday. Chakrabarty, however, said he was 'not at all' concerned over rising bonds yields.

The benchmark 10-year government bond has risen by 35-40 basis points since July.

Banks have also reduced deposits rates in the recent past, but bankers say they will not be able to reduce it further.

Bankers fear if deposits rates are reduced further than government savings schemes which are paying 8 per cent return, it will take away depositors from them. Last week, the country’s largest lender, State Bank of India, had withdrawn its 1000-day deposit scheme which offered 7.25 per cent. SBI’s peak deposit rate is 7.75 per cent for 8-10 year tenures.

On the government's borrowing programme, Chakrabarty said borrowings were being conducted smoothly. He also said despite the drought condition in some regions of the country, no bank had informed RBI about any difficulties in achieving their lending target for the priority sector. According to norms, banks have to extend 18 per cent of their loans under the priority segment to agriculture.

Speaking on the issue of financial inclusion, the deputy governor said regulatory concession might be extended for facilitating financial inclusion.

In 2006, RBI had said such concessions would be given to banks but it was not implemented. Chakrabarty said RBI might consider the proposal once again.