Real returns on deposits to turn positive, but EMIs to pinch more

Liquidity expected to remain tight, further rise in deposit rates possible.

With sustained liquidity crunch forcing banks to increase deposit rates, the real returns to depositors are set to turn positive after about 10 months.

Real returns, adjusted for the inflation rate, have been negative since February, when the wholesale price-based inflation rose beyond eight per cent and deposit rates were around seven per cent.
 

REAL GAINS Deposit rates (%)
SBI	555 days	8.50
ICICI Bank	590 days	8.00
HDFC Bank	381 days	7.75
Bank of Baroda	444 days	8.35
PNB	555 days	8.25
IDBI	500 days	8.50
Dena Bank	365 days	8.25
Source: Banks

Inflation for November is expected to come down to around 7.5 per cent, according to projections by market analysts. With banks offering 7.75 to eight per cent for fixed deposits, depositors have reasons to cheer. According to a poll by Reuters, headline inflation for November is seen easing to 7.48 per cent, as against a 8.58 per cent increase in October. The government will release the inflation data for the month tomorrow.

With liquidity expected to remain tight, there is a possibility that banks will lure retail depositors with better rates, even though the Reserve Bank of India (RBI) signaled a pause in the interest rate increase cycle during the second quarter review of its annual monetary policy.

IDBI Bank Chief Financial Officer P Sitaram said while most banks had made a substantial upward revision in deposits rates, there would not be a significant rise in the immediate future.

However, small increases could happen in February, depending on market conditions and fund requirements, he added.

RBI will announce the mid-quarter review of annual policy on December 16 and is expected to focus on bringing back liquidity to a comfortable level and leave key policy rates unchanged, say analysts.

“We do not believe RBI will change its stance on bringing back liquidity to more manageable levels or signal a re-start of its rate increase cycle despite the recent strong economic data,” Nomura Securities said in a research note.

During its second quarter review, RBI had raised concerns over negative interest rates and the consequent lower deposit growth.

“One important consequence of negative real rates is that banks have seen a deceleration in deposit growth rates as savers look for higher returns elsewhere. If bank credit is not to become a constraint to growth, real rates need to move in the direction of encouraging bank deposits,” RBI said.

Low deposit rates have resulted in slow deposit growth, which stood at 15.78 per cent for the year-ended November 19, as against the 18 per cent rate projected by RBI. However, credit growth is in line with the central bank’s projection of 20 per cent.

However, there is bad news on the lending rate front. With cost of funds going up, some lenders have increased benchmark lending rates or base rates. Punjab National Bank and Bank of Baroda increased their base rates by 50 basis points to nine per cent, effective on Monday. Dena Bank’s revised base rate will be effective from Wednesday. IDBI Bank said their revised base rate would be effective from January 1.

The country’s largest lender, State Bank of India, which recently increased deposit rates, has said the bank will review its base rate only in January.

Meanwhile Kolkata-based Allahabad Bank has increased its base rate by 50 basis points from 8.50 per cent to 9 per cent and Benchmark Prime Lending Rate (BPLR) by 75 basis points from 12.50 per cent to 13.25 per cent with effect from 14.12.2010 in view of the changes in the interest rate scenario.

PTI adds: Indian Overseas Bank on Monday raised its Benchmark Prime Lending Rate (BPLR) by 25 basis points (bps), with immediate effect.

The Chennai-headquartered bank had recently approved increasing BPLR to 13 per cent, as against the current 12.75 per cent an year (excluding housing loans), it said in a filing to the Bombay Stock Exchange.