Short-term deposit rate shoots up

Banks raising one-year deposits at 9.75% to meet MF, pension fund redemptions.

The short-term deposit rate has gone up sharply with banks scurrying for deposits of one-year maturity to repay mutual and pension funds. Banks are raising one-year deposits at 9.70-9.75 per cent as against 8.5-8.75 per cent a month ago.

Rates have gone up mostly for bulk deposits and may extend to the retail segment also, said a banker.

Most banks facing a tight liquidity situation during this period last year had raised one-year money from the mutual and pension funds at an average cost of 10-11 per cent. This is coming up for redemption now. The deposits accounted for 7-8 per cent of the total aggregate deposits mobilised last year, a banker said.

The bulk deposit rates had gone up in January and February last year too, but for a different reason. After the Reserve Bank of India hiked the cash reserve ratio (CRR) to rein in credit growth in December 2006, banks had to raise costly money. Credit grew by an average 30-32 per cent last year which was way above the RBI's estimate of 20-21 per cent.

Incidentally, in the corporate bond market, banks could raise one-year funds through certificate of deposit at 9.10-9.15 per cent. But dealers explained that money raised through certificate of deposits cannot form part of the deposit base.

Some dealers said that the rate war will continue till the end of February when all the banks are expected to be through with their liquidity provision. Post-February, the rates may moderate.

The aggregate deposit growth for the financial year 2007-08 so far has been higher by 19.5 per cent compared to a growth of 14.2 per cent in 2006-07.

Bankers also said that the increased deposit will also trigger demand for investments in government securities to maintain the statutory liquidity requirement. An SLR bond qualifies for the portfolio maintained by banks to meet the statutory liquidity requirement. SLR is the percentage of total deposits banks have to maintain in the form of cash, gold or approved securities. At present, the minimum SLR is 25 per cent. Another reason for the rush to raise deposits is to boost the balance sheet as the financial year draws to an end. Also, there is uncertainty on the liquidity front. Though the system is flush with liquidity, it is parked only in some specific pockets.

Besides, foreign exchange inflows, which used to be a constant source of liquidity for the market, is down to a trickle following the correction in the Indian equity market and the dollar crunch in the international market following the subprime crisis.