Tough time ahead for senior citizens as deposits rates fall

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Senior citizens and those depending upon interest income will have a tough time in 2009 as deposit rates which have already declined by 100 basis points in the past one month are expected to fall further as RBI is likely to further easy money supply.

Most of the banks including the largest public sector lender State Bank of India (SBI) has decided to cut down the peak deposit rates by another 100 basis points from January 1.

SBI, which earlier paid interest at the rate of 10.5 per cent (11 per cent to senior citizens) in October, will slash its peak rates on fixed deposits to 8.5 per cent.

The other large state-owned lenders like Bank of Baroda and Bank of India too have announced plans to cut deposit rates in the new year.

Deposit rates are expected to come down by another 200 basis points in the next six months as inflation has softened considerably, said a senior official of Oriental Bank of Commerce.

Making a case for "aggressive" reduction in interest rates, the Government in its Mid-Year Review of the Economy, tabled in Parliament said "there is considerable scope for monetary policy easing over the next six to 12 months to offset the global increase in demand for money that is being transmitted to India".

According to the Crisil Principal Economist D K Joshi, the declining inflation rate provides more leeway to the RBI to further slash interest rates. I expect a 100 basis point cut in both the repo (short-term lending rate) and reverse repo (short-term borrowing) rates."

The inflation rate which peaked to 12.91 per cent in August has come down to 6.61 per cent in December and according to experts it may further ease to around two per cent by the end of current fiscal, a development which will have a bearing on the interest rate.

The deposit rates which were around six per cent in the beginning of the year, followed the inflation curve and peaked to 10.5 to 11 per cent in October bringing cheer to those who keep their money in the fixed deposits.

Currently, peak fixed deposit rates of many public sector banks which command 70 per cent of the business falls in the range of 9.5-10 per cent.

Empathising with the savers, Punjab National Bank Chairman and Managing Director K C Chakrabarty said, "We all forget, there is also one category who are called savers, and they are the worst sufferers when interest rate goes down and collectively 90 per cent of us are savers."

Noting that only two per cent of the population invests in the stock markets, he said, bulk of the people keep their surplus with the banks in the form of fixed deposits.

If inflation comes down, deposit rates also will move southwards, he added.

Source-Economic Times
December 2008

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