Deposit rates stay high on policy uncertainty

The interest rates on deposits continue to be high despite ample liquidity due to monetary policy uncertainty and expectations that liquidity would tighten later this year. Banks are still offering peak interest rates of 9 to 9.5 per cent on deposits of one to three year maturities.

Bankers, under the aegis of the Indian Banks' Association (IBA), are expected to meet the RBI governor, Y V Reddy, for a discussion ahead of the second quarterly review of the monetary policy on October 30. 
 

COSTLY FUNDS
Years	Deposit rates 1-3 yrs	Lending rates
1999-00	8.50-9.50	12.00-12.50
2000-01	8.50-9.50	11.00-12.00
2001-02	7.50-8.50	11.00-12.00
2002-03	4.25-6.00	10.75-11.50
2003-04	4.00-5.25	10.25-11.00
2004-05	5.25-5.50	10.25-10.75
2005-06	6.00-6.50	10.25-10.75
2006-07	7.50-9.00	12.25-12.50
2007-08	7.50-9.50	12.75-13.25

The bankers would ask the RBI not to increase the cash reserve ratio, the proportion of deposits that banks keep with the central bank, as any increase would have wider ramifications and directly impact the interest rates.

The State Bank of India chairman, O P Bhatt and ICICI Bank managing director and CEO, K V Kamath, would be among the bankers who would meet the RBI governor.

Unlike India, the use of monetary tools is very transparent in the US. "Here, there is an element of surprise. Maybe one tool should be used instead of multiple tools. There should not be a hike in the CRR either," a senior banker said.

"Banks should have reduced the interest rates. But the rates have not come down as they should have. Banks are uncertain about the direction of the market. There could be a sudden tightness in liquidity. Banks are factoring in an uncertainty in product pricing," the banker said.

TS Narayanasami, chairman and managing director, Bank of India, said "the (interest) rates are market-related. Banks need resources for expanding credit. There is a prospect of credit picking up; it is not possible to bring down rates. As we move closer to March, deposit rates might go up."

Bankers would try and impress upon the RBI governor that higher interest rates have impacted the demand for retail loans, including home loans, and adversely affected the construction and automobile sectors. Continuation of high rates would impact the cement and other manufacturing sectors as well and the economy as a whole.

Rupa Rege Nitsure, chief economist with the Bank of Baroda, said, "almost 85 per cent of credit is funded from deposits by public sector banks. Since the bankers were not sure whether the slowdown in the first quarter of 2007-08 was an aberration or permanent, they wanted to build a good resource base. If there is a moderation in credit and interest rates on credit side climb down going forward, banks will have to reduce the deposit rates."

"Uncertainty premium is an issue. Banks had to raise high cost deposits in the last 2-3 years. They raised term deposits at the outset itself, which was a rational decision. Now that the credit demand has slowed down, the credit cycle has turned and there is no compulsion to raise deposits. Each bank has to take a view. The lending rates have already come down by 50 basis points. Banks have to cut the deposit rates by 50 basis points this quarter if they want to protect their net interest margins at current levels."

The RBI is, however, unlikely to buy bankers' uncertainty argument. The central bank is expected to toe the line that guidance about the future course of interest rates and the availability of ample liquidity was an invitation to markets to under-price risks.

Despite the tight monetary policy stance, liquidity in the system is expected to be easy on the back of strong foreign fund inflows into equity markets, a treasurer with a private sector bank said.