Deposit rates may come down to 7.5%

NEW DELHI: It is double whammy for the consumers. On the one end, the earnings on short term deposits are all set to dry up with banks beginning to reduce the deposit rates on short term funds to below 7.5 per cent.

On the other, those availing the consumer and home loans will continue to feel the heat of high interest rates as the banks are not willing to further dent their margins following the 0.5 per cent increase in the Cash Reserve Ratio (CRR) by RBI Governor Y V Reddy in the first quarter credit policy review.

Though Finance Minister Palaniappan Chidambaram expects the interest rates on one year bank deposits to be lowered by half a percent, bankers do confide that the downward revision would be much sharper.

State Bank of India (SBI) has already taken the lead to reduce the interest rates on one year deposits to 9 per cent from the earlier 9.5 per cent. Deposit rates had virtually peaked in last few months at 10 per cent.

Finance Minister expects that the interest rates would be stabilised at 8.5 per cent. However, most bankers on condition of anonymity have hinted that the cut would be sharper to 7.5 %.

Though most bankers have been taken aback by the increase in CRR by 0.5 per cent to seven percent, not many have aired their discomfort in sucking away Rs 16,000 crore from the system. The second instrument effectively used by the RBI Governor to suck excess liquidity is removing the cap of Rs 3000 crore on reverse repo auctions done on a daily basis.

“Liquidity is a concern for RBI and it is legitimate” Finance Minister P Chidambaram told chief executives of banks at the customary post-credit policy review meeting held earlier today.

Consumers - individual or corporates - would be the ones at receiving end as the cost of funds continue to be high with prime lending rates perched at 13.5 per cent while the returns on individual savings are set to dwindle.

Any relief from the high lending rates can be expected only in the mid-term review of the credit policy, three months from now, on October 30.

Second major issue that has come to fore is to reduce Government’s equity in public sector banks to below 51 per cent. Finance Minister has hinted at revival of his agenda to make the state-owned banks more broad-based by pumping in additional equity through public offers.

Earlier this year, the Finance Minister had dumped the move to reduce the centre’s equity in public sector banks to 33 per cent following opposition from Left allies.

However, in the revised proposal, the government will continue to hold management control and retain the right to appoint the chairmen of public sector banks.