Fixed deposit rates may decline in coming weeks

Fixed deposit rates are likely to come down soon as liquidity in the market has improved while credit demand has not seen much pick up.

Signaling softening of rates, two state-owned banks Central Bank of India and Oriental Bank of Commerce have already reduced their fixed deposit rates by up to 1% on various maturities beginning April.

Noting that liquidity condition is improving, Bank of Baroda Chairman and Managing Director MD Mallya said, "I think the deposit rates may come down. As far as lending rates are concerned, we will have to wait for the RBI policy before taking a call on it."

According to him, easing of liquidity situation could result in softening of deposit rates on select maturities depending on the asset liability position of individual banks.

Interestingly, the possibility of banks reducing deposit rates has emerged at a time when the Reserve Bank is expected to go for another hike of 25 basis points in its key policy rates next month.

The Reserve Bank is scheduled to announce annual credit policy for 2011-12 on May 3.

Indian Bank Chairman and Managing Director TM Bhasin said liquidity in the market has eased.

Interest rate on term deposit with maturity between 91-179 days of Central Bank of India has witness a decrease of 100 basis points (or 1%) from 8% to 7% effective April 1.

Oriental Bank of Commerce slashed interest rates on fixed deposits of over Rs 1 crore by up to 1% for select maturities from April 2.

"Generally during the first half of the fiscal the credit demand is leaner and we are also seeing an easing of the liquidity situation. This, along with the fact, that towards the fiscal-end and April banks have incremental capital may be the reason for cut in rates," StanChart Head of Research Samiran Chakrabarty said.

Crisil chief economist DK Joshi said: "We do not think the rate slash will continue on a sustained basis. No doubt there is an easing of the liquidity but inflationary pressure is still there."

He further said that credit offtake by various sectors is likely to weaken in the near future.

Last month, the RBI hiked its key short-term lending and borrowing rates by 25 basis points (0.25%) each to tackle inflation. The short-term lending (repo) rate now stands at 6.75% and the borrowing (reverse repo) rate at 5.75%.