Bankers see higher PPF rate limiting more deposit rate cuts

Bankers have said there is more room to cut deposit rates which can help bring down lending rates, but fear that competing savings instruments like PPF and tax-free bonds will limit their ability.

"We think deposit rates are dropping. However, there is a stickiness to the levels to which they can drop. The main reasons being competition from small savings rates," Uday Kotak, vice-chairman and managing director of Kotak Mahindra Bank, said.

He cited that investments in the public provident fund (PPF) earn an interest of 8.7 per cent while tax-free bonds also give good yields.

"These two are competing with our ability to drop deposit rates beyond a point, but they are still coming down," he said.

At present, his bank, the fourth largest private sector lender, offers the highest rate of interest at 8.25 per cent. It can be noted that interest earned on fixed deposits is not tax-free.

ICICI Bank managing director and chief executive Chanda Kochhar said deposit rates have been declining since last November and are clearly on a declining trend.

All the major banks have effected deposit rate cuts in the past 8-10 months and in some cases, there have been multiple instances of cuts.

This has helped them cut the base rates or the minimum lending rates. The degree of lending rate cuts depends on a bank's composition of deposit base and how long it takes for the repricing.

HDFC Bank deputy managing director Paresh Sukthankar said one of the biggest cases for a deposit rate cut comes from the very sluggish growth in credit, which stood at under 10 per cent.

He said deposit growth has been "modest", but still credit

growth has been trailing which keeps off banks, adding more deposits and hence, effect deposit rate cuts.

"It is true that deposit growth has been muted. There has been a slight pick-up and more importantly deposit growth is outpacing loan growth. So, when you look at it in relation to each other, there is probably some room for deposit rates to come down and I think that would be the case in some months," he said.