Banks likely to cut interest rates
14-02-2000 19:41:13
Banks are likely to follow the lead of the State Bank of India, and cut interest rates on deposits ahead of a possible lending rate cut expected in March, bankers said today. The country`s largest commercial bank cut rates on long term domestic deposits by 50-100 basis points at the weekend.
SBI now offers between 5% and 10% on deposits with maturities from up to 45 days to over three years. Other banks offer between 5% and 11% across similar maturities. The Reserve Bank of India`s crucial bank rate is currently at 8%. The Economic Times last week quoted junior Finance Minister Dhananjay Kumar as saying that the Central budget on February 29 could signal an interest rate cut.
Analysts say other banks were expected to follow SBI`s lead, since most held back rate cuts when the government cut rates on voluntary savings such as public provident funds deposits and postal savings by one percentage point last month.
"We are likely to reduce our rates. We may cut our rates on five year deposits to 10% from 10.5%," C.L. Shenoy, general manager of Corporation Bank told Reuters. "We are watching the market. We will decide about it (deposit rates) soon," an official at Bank of Baroda, who declined to be named, said.
LONG FIRST, SHORT MATURITIES TO WAIT
Bankers said while last month`s cut in the PPF and postal savings` rate helped lower deposit rates in the long maturities, fear of a migration of funds to the mutual fund sector was preventing rates from falling in the shorter maturities.
Bankers have had to keep deposit rates higher after the government exempted mutual fund dividends from tax in its FY2000 budget. Collections by mutual funds totaled Rs212bn during April to September 1999 against total collections of Rs227.11bn in FY99.
"The deposit flow to banks has been affected in any case by competition from mutual funds. We may not be able to cut rates in the shorter maturities," Shenoy said.
Bankers said the deposit rate cuts were a prelude to the possible cut in lending rates soon after the Central budget.
The prime lending rates of state-run banks range between 12% and 13% while in case of foreign and private banks, the rates are between 13.5% and 16.5%. Speculation that the Reserve Bank of India (RBI) may signal lower interest rates immediately after the budget has sent government bond prices soaring.
India`s bond markets have discounted a 100 basis point cut in the bank rate already with yields of 10-year securities dropping by over 100 basis points since the time of cut in rates on small savings.
-Courtesy Probity Research |
