Short-Term Rates Set To Soften

Private and foreign banks are set to reduce their short-end deposit rates from the unprecedented highs seen last week, as call rates yesterday appeared to stabilise in the 9-15 per cent range. Most bankers foresee a downward revision taking place during the current week.

I expect some banks to cut rates by at least 2-3 per cent. This may happen from today (Wednesday), a banker at the treasury desk of a foreign bank said. If they do not do it, I am afraid they would be acting as charitable organisations, he added.

The move by the banks underlines the fact that the spurt in interest rates was a short term phenomenon and that the short term rates are firmly headed southwards.

 

The fundamentals of the economy has not changed. The rates will soften to levels that existed for most part of the current financial year, bankers said.

The foreign and private banks were forced to raise short term deposit rates to prevent an asset-liability mismatch last week, as call rates soared to as much as 60 per cent following the Reserve Bank of Indias move to raise bank rate and cash reserve ratio in an effort to stem the depreciating rupee.

The Dutch bank ABN Amro, which at point last week, offered 17.75 per cent for a 45-60 day deposits, has now lowered the rate for the period to 13 per cent. The other private and foreign banks were offering up to 12-13 per cent for short term deposits upto 90 days. As opposed, the public sector banks had fixed their rates at about 6-8 per cent for deposits upto 90 days.

The call rates have now been stable for the past two days. We will wait and watch for a week before we decide to revise the rates, said a private bank official.

The private and foreign banks, which rely on call rates for funds, were forced to raise their short-end deposit rates to prevent asset-liability mismatch, as borrowings from the call market became unaffordable in the flare up last week.