Interest rate on FDs may fall by 100 bps

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Banks may cut fixed deposit rates by 100 basis points in two steps, bringing them down to a maximum of 9%. At present, peak deposit rates are between 9.5 and 10%.

The reduction in deposit rates will help protect margins for the banks that have cut lending rates by around 150 basis points over the past few weeks.

“Banks have to keep a gap between their lending and deposit rates in order to maintain their net interest margin. Lending rates have already been cut. Deposit rates have softened and are expected to come down further in the next few weeks,” Uco Bank executive director V K Dhingra said.

Government-owned banks are expected to reduce deposit rates by 50 basis points by the end of this month and by another 50 basis points by end of January. The rates may vary depending upon the tenure of the deposit. Most banks are offering the highest return on one-year deposits.

The country’s largest bank, State Bank of India, is among the banks that are planning a 50 basis point cut in deposit rates from January 1. The asset liability committee (ALCO) of the bank has taken up the issue in its recent meetings and the bank is likely to make an announcement in this regard in a few days, said an SBI official.

“The money market condition is also showing signs of easing which in turn is bringing down the requirement of high-cost fund for banks. These conditions indicate possibility of further cut in deposit rates,” Mr Dhingra added.

All the PSU banks have reduced their lending rates by an average of 150 basis points in the last few weeks for almost all loans to their prime borrowers. In some cases, such as for small housing loans, the rate reduction has been even sharper at 200-300 points.

In contrast deposit rates have come down by only 50 basis points leaving scope for another 100 basis point reduction in deposit rates. Rates for saving bank deposits are, however, likely to remain untouched at 3.5%.

Source-Economic Times
December 2008

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