Banks close deposit rates to where they were five years ago

In the last few months the banks have slashed their deposit rates which have shrink depositors income. Banks have reduced interest rates (especially for deposits of up to one year) by about four percentage points in comparison to a year ago.

At present after the cut the deposit rates of 15 days to one-year period range from 3 per cent to 6.25 per cent per annum. Whereas five-and-a-half years ago, in March 2004, the peak rates for this time duration was about 5.25 per cent.

After that the deposit rates began to rise and gradually over the next few years, the deposit rates reached 8 per cent in March 2008.

Moreover banks started lending aggressively as the economic growth started improving.

For aggressive lending banks needed more resources thus they started increasing deposit rates.

However in the bulk market interest rates in the bulk fixed deposits market (deposits above Rs 1 crore) were equally higher by 0.50-1 percentage point. Thus the deposit rates of one-year tenure increased to 10.25 per cent a little over a year ago with the economy moving fast.

The global meltdown undulate also started effecting India, GDP numbers were reduced, as of loan growth figures. The banks also did not require extra liquidity as they had enough.

The investor’s confidence got shaken due to crisis but bank treasury continued to fill up even when they could not find lend-able opportunities for the money pouring in.

For instance State Bank of India for a few months received deposits at the rate of about Rs 1,000 crore a day which led it to set out the bulk money in the Reserve Bank of India’s reverse repo auctions that earned it 3.25 per cent.

Thus banks have been steadily reducing deposit rates for the past few months and now the rates have been closed to where they were five years ago.

After revision State Bank’s one-year deposit is at 5.75 per cent.

However some of the banks have reduced their rates deeper. Punjab National Bank, Union Bank and Indian Bank offer about 5.50 per cent for deposits of similar tenor while Bank of Baroda, a few months ago, pruned them to 5 per cent. While other bank’s deposit rates stand at 6.25 per cent.