Uttam Sharma/Mint

Uttam Sharma/Mint

Two banks reduce deposit rates despite high inflation

Two banks reduce deposit rates despite high inflation

If you wish to park your savings in a bank fixed deposit, you may want to hurry now. Deposit rates were on the rise in the last few months, but they are unlikely to move any further.

Uttam Sharma/Mint

Interest rates on certificate of deposits (CDs), too, have declined. Interest rates on CDs of three months have fallen by close to 200 basis points (bps) and is now in the range of 8-8.50%.

One basis point is one-hundredth of a percentage point.

Central Bank of India has reduced interest rates on various maturity periods, most of them less than a year, by 25-100 bps. The bank has reduced interest rate by 100 bps on fixed deposits maturing between 91 days and 179 days. With the latest revision, the peak rate offered by the bank now stands at 9.25% compared with 9.60% offered earlier for a maturity of 555 days.

Delhi-headquartered OBC has also reduced rates by 100 bps for deposits of at least 1 crore.

“Liquidity in the banking system is comfortable now. Usually, in the first quarter of the financial year, the credit offtake is sluggish and is likely to be the same this year too. Hence, we do not see the point in offering very high interest rates to depositors and have rates revised downwards on some of the maturity periods," says Sinha.

While it is not yet clear whether other banks will follow suit, Punjab and Sind Bank’s executive director P.K. Anand said, “Liquidity has eased and the credit offtake is not very good. We will wait till 3 May before taking a decision on reducing deposit rates."

However, some experts see the reduction as an exception, saying it’s unlikely other banks will follow suit. Says Abheek Barua, chief economist, HDFC Bank Ltd: “Liquidity has eased only temporarily. The situation will remain like this only till May-end and the overall interest rate trend is likely to maintain an upward path."

The reduction in deposit rates is in sharp contrast to the policy stance taken by RBI. To tackle the inflationary situation, the banking regulator in its last monetary policy review in March increased both the repo rate, the rate at which it lends to bank, and reverse repo, the rate at which it accepts deposits from banks, by 25 bps each. Accordingly, the repo rate now stands at 6.75% and the reverse repo at 5.75%.

With inflation still at a high, it is likely that RBI will revise the policy rates upwards by another 25 bps in its next monetary policy review.