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RBI Signals Banks To Hike Deposit Rates

Mumbai :  On the heels of the provident fund board hiking interest rates by a percentage point to 9.5 per cent, the RBI on Thursday (Sept 16) signalled to banks to raise fixed deposit rates
PTI September 16, 2010 17:13 IST
PTI
Mumbai :  On the heels of the provident fund board hiking interest rates by a percentage point to 9.5 per cent, the RBI on Thursday (Sept 16) signalled to banks to raise fixed deposit rates to compensate small savers for rising inflation. The move would also help banks garner more funds to meet their lending needs.

"If bank credit is not to become a constraint to growth, the real rates need to move in the direction of encouraging bank deposits", the RBI said while raising the key policy rates by up to 50 basis points for the fifth time this year.

While inflation was 8.5 per cent in August, the maximum return that banks are giving is 7.75 per cent on fixed deposits between three to 10 years.

The Central Board of Trustees, the highest policy making body of the Employees Provident Fund Organisation (EPFO), yesterday decided to raise the interest rate on provident fund deposits for 2010-11 to 9.5 per cent from 8.5 per cent. The rate is the highest in the last five years.

Some bankers have expressed the possibility of diversion of deposits to the provident fund on account of the increase in difference between the bank fixed deposit and PF rates. About a year ago when the FD rates were about 10 per cent and the PF rate was 8.5 per cent, unions demanded that the two be aligned.

The RBI also said that the decision to raise short-term lending (repo) and borrowing (reverse repo) rates by 25 basis points and 50 basis points to 6 and 5 per cent, respectively, was "motivated by the need to end the prevalence of negative real interest rates".

Negative real interest rates refer to the difference between the deposit rates and inflation. It indicates that the bank deposits have not been adequately protected against declining value of money on account of inflation.

Bankers, including Bank of Maharashtra CMD Allen Pereira, Bank of Baroda Executive director R K Bakshi and Punjab and Sind Bank executive director P K Anand, opined that lenders would have to take a call on hiking interest rates in October. In July, when RBI raised repo and reverse repo rate, 40 banks raised their deposit rates and 26 lending rates.

Currently, market leader State Bank of India pays 7.75 per cent on fixed deposit for 8 to 10 years, while the largest private sector bank ICICI gives similar returns on deposits with maturity period of three to 10 years.


Home, auto and corporate loans are likely to become expensive from October, with bankers  saying that interest rates may be hiked next month in response to the Reserve Bank raising policy rates to tame inflation.

"In early October, interest rates could be revised and chances are there it could be revised upwards," Bank of Baroda's Executive Director R K Bakshi said. Bankers said they will hold on to the rates till September 30, which is the half yearly closing of the banks.

High interest rates could temper demand for loans and thus curtail consumption. "Rate of interest may have to go up. bank have to take a view at the end of the quarter. Till September 30 I do not expect any change. Pressure is there to increase rates in the near term," Bank of Maharashtra CMD Allen Pereira said.

Short-term funds would get little costlier and there is possibility that the short-term (deposit) rates could also go up in the future, bankers said. "Till September 30 everyone will hold on to the interest rate and following that there might be some passing on effect to customer," Punjab and Sind Bank executive Director P K Anand said.

Central Bank of India CMD S Sridhar said, "Bankers will adopt a calibrated approach. The examination of interest rates is on cards as cost of funds for banks is increasing."