Short-term FD rates shoot up

Short-term retail fixed deposit (FD) rates have gone up sharply in the past few days, with banks offering better rates on deposits up to six months, as they expect that interest rates will soften in the long term.

State Bank of India (SBI), the country’s largest bank, has raised rates on FDs by 100-225 basis points for all tenures up to 180 days. SBI now offers 6.25 per cent for deposits of seven to 90 days and seven per cent for deposits maturing in 91-180 days.

“We think interest rates will come off after six months time, as inflation comes under control. So, why should we pay high for longer tenures when rates will come down after six months?” asked a senior official from SBI.
 

ON A HIGH Peak interest rates on fixed deposits in tenures below 180 days
Banks	Interest  rates (%)
State Bank of India	7.00
Bank of India	7.00
Punjab National Bank	7.00
Union Bank of India	7.00
HDFC Bank	6.75
Axis Bank	6.75
Bank of Baroda	6.25
ICICI Bank	6.00
Source: Banks

HDFC Bank also raised rates on FDs of shorter tenure. Other banks are expected to do likewise. “Short-term rates are market driven, so if a bank like SBI hikes its short-term rates, others always follow,” said a top official of Dena Bank.

The Reserve Bank of India had increased the savings bank rate by 50 basis points from May 3. After the policy announcement, a number of banks effected deposit rate increases but only as an adjustment to the new interest rate on savings account. “The rate hikes were to make short-term deposit products more attractive as compared to the four per cent being offered on savings bank accounts,” said a senior official with Union Bank of India.

Bank of Baroda, IDBI Bank and Union Bank of India raised their short-term deposit rates by a similar 50 basis points. Indian Bank also raised its deposit rates, by 25-275 basis points, with the interest rate of 6.25 per cent for deposits of seven to 90 days maturity.

Also, liquidity may come under pressure in the short term because of advance tax outflows in June and the government’s increased short-term borrowings. According to the RBI’s revised treasury bills issuance calendar, the government will now borrow Rs 11,000 crore per week, instead of Rs 7,000 crore per week as planned earlier. “The incremental amount that will be drained out of the system could create some problem on the liquidity front,” said the SBI official.

RBI’s annual monetary and credit policy statement said it expected inflationary pressure to subside in the second half of the current financial year.