Slowly banks are raising fixed deposit rates

In the coming months fixed deposit can again be a good investment option as the deposit rates are on their way up. But the things will get better in fiscal 2010-11.

Last week HDFC Bank had raised its deposit rates by 25-150 basis points (one basis point equals one-hundredth of 1%) across various terms. Earlier this month, IDBI Bank and ICICI Bank had raised the deposit rates by 25-50 basis points for some maturities, while J&K Bank had raised rates by 75 basis points on deposits above one year. The public sector Union Bank of India is proposed to raise deposit rates later this week. More banks are likely to follow the suit.

According to analysts the bigger banks will join the bandwagon to remain in competition. Ashish Gupta and Deepak Ramineedi, analysts at Credit Suisse, wrote in a report dated February 22, “With these rate actions, State Bank of India and ICICI Bank deposit rates are now at a 50-100 basis point discount (for some maturities) and they will now need to follow suit.”

But big bankers disagree with it. OP Bhatt, chairman, SBI, said in Delhi that his bank will not raise deposit rates before May-June as it has surplus liquidity (the amount of free money it had to give out as loans).

By the end of December 31, 2009, the bank liquidity was whopping over Rs 75,000 crore.

MD Mallya, chairman and managing director, Bank of Baroda said, “There is ample liquidity in the system. Hence, at the moment we are not looking at raising interest rates on deposits.”

But Gupta and Ramineedi of Credit Suisse said that “as loan growth (14.8% currently) accelerates and the central bank starts tightening money, this liquidity will also dry up soon.” In the recent past banks’ deposit growth rates have declined as much as four-year low of 17%. Therefore, banks raise lending rates then deposit rates have to rise.