Should deposit rates go down further
The interest rates on deposits have been continuously coming down since the beginning of the financial sector reforms.
During this financial year itself the interest rates on deposits have come down almost by 200 basis points from the levels of 8-8.5 per cent to the levels of 6.5 per cent for the longer-term deposits. The reduction on the short-term deposits has not been of the same quantum during this period.
Though all the interest rates have been deregulated and banks are free to fix their own rates based on the market, deposit rates and the yields on the other investments have become market driven, still some of the interest rates are administered or regulated like savings bank, public provident fund, national savings certificates etc. and all these rates are still at the same levels as at the beginning of the year.
Though considerable debate has been done and many market participants and bankers have expected a reduction in these rates the same has not taken place.
The small investors are to be thankful and may look to these avenues for getting reasonable returns on their savings. The mid-term review of monetary and credit policy announced a triple bonus of cuts in bank rate, repo rate, and cash reserve ratio by 25 basis points each.
The market responded positively and the yields on various investments and money market instruments have moved southward defying many expectations and breaching all the targeted levels.
The ten-year benchmark government security has touched a low of 6.33 per cent yield by the end of November. The targeted levels are continuously revised downward with the market movement.
The RBIs mention in the credit policy of no further bank rate cut till the end of this fiscal indicating a neutral bias has not stopped the market to see the yields touching historical lows during this week.
Credit offtake is not being spurred by the bank rate cut and the consequent prime lending rate (PLR) and deposit rate cuts. The banks are not finding many avenues to improve their margins with adequate degree of safety.
The cut-off yields at the latest treasury bill auction for 91 days and 364 days, which are below the overnight call and repo rates, are indicative of the directionless movement of the market.
The reduction in the benchmark rates by the RBI and the consequent downtrend in the yields causing the banks to reduce the deposit rates and the PLRs has not given the reasonable benefit to the small investors and the small and the medium level borrowers. Small investors are witnessing the reduction in their return from savings due to deposit rate reduction.
The reduced interest rates for advances and low market interest rates are not within the reach and scope of the small and medium level borrower who has no way to access the market directly unlike the big corporates and institutions.
The ALM and risk management techniques having fully stabilised in banks and given due importance. Banks are able to decide the pricing of their deposits and assets depending on the gaps and mismatches and the prevailing market conditions. The rates on assets get reset or re-priced much sooner with changes made where as the deposits and liabilities which have been contracted for longer maturity tenors earlier do not get re-priced immediately.
This situation in the falling interest rate scenario constrains the banks from cutting lending rates significantly because of high cost of funds.
With liquidity ample, inflation benign, no significant increase in the credit offtake and the government having completed 87 per cent of its borrowing target, there is unlikely to be any pressure on interest rates further from the macroeconomic front in the near future. The tools at the disposal of the RBI are aggregative except for
