Customers lap up FDs before rates fall again


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Customers have swamped banks to put money in fixed deposits in order to garner high interest rates, as most banks plan to cut deposit rates by up to 1.25 percentage points from January 1. The daily collections have gone up nearly three-fold for some banks.

Many bank branches are finding it difficult to dispose off the deposit-related work on the same day because of this rush. December 31 was also the quarterly closing for the banks and this had made things even more difficult.

"We were collecting about Rs 1 crore daily on account of fixed and term deposits for different time periods from the last few months. However, over the last few days the average collection is hovering at around Rs 3 crore," said a Bank of India branch manager. Interest rate on fixed deposits has already come down by a percentage point this month and another round of cuts is expected in January and February. At present, the peak rate at fixed deposits is 10% (banks offer an additional 0.5% to senior citizens). Inflation is expected to fall to 4-5% by March 2009. A one year fixed deposit fetches up to 10% return. This yields a real return of 5-6% against the long-term average of 2%. Before interest rates fall in line with inflation, this is a good opportunity for investors to book high return deposits. "Inflation is likely to come down to below 5% by March and this would result in further rate cuts by the banks," said director and chief executive of Indian Council for Research on International Economic Relations, Rajiv Kumar.

High real interest rates is not the only reason deposit rates have to come down. In many cases, customers are transferring their money from saving and current accounts to fixed deposits. This translates into a lowering of deposits under the banks' current and saving account (CASA).

A low ratio of CASA deposits is a cause of concern for banks because these deposits are the cheapest source of fund for banks. Saving bank deposits get an interest of 3.5% while there is no interest on current account deposits.

To make up for a drop in the share of these low cost deposits, banks are expected to bring down fixed-deposit rates even further. Besides, banks have also dropped their lending rates sharply over the last month.

Source-Economic Times
January 2009

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