Fixed deposit rates to come down, says FM

He says that interest rates on shorter maturities may come down by 0.5 pc, reports Gaurav Choudhury.

Finance minister P Chidambaram, speaking a day after the Reserve Bank's credit policy review, said on Wednesday that he expected the interest rates on fixed deposits of shorter maturities to come down by 0.5 per centage points.

"Banks may lower deposit rates of one-year maturity by 0.5 percentage points. Some banks have already done that and the interest rate has come down to 8.5 per cent. My impression is that it will stabilise at that level," Chidambaram told reporters after a meeting with chief executive officers (CEOs) of public sector banks here.

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Chidambaram observed that the Reserve Bank of India (RBI) is concerned about liquidity, which has surged as more rupees have flooded the system in view of an inflow of foreign funds. “That is why the cash reserve ratio (CRR) was raised by 50 basis points," the minister said.

The RBI on Tuesday increased the CRR to 7 per cent and removed the Rs 3,000 crore ceiling on reverse repo -- the practice of banks parking their excess cash with the central bank.

The finance minister said the twin measures would result in a profit margin erosion for banks, but their balance sheets were robust enough to cushion the impact.

"These two measures will have marginal impact on net interest margins of banks. The banking sector has to bear (the drop in margins) and help fight inflation," he said.

The two instruments could result in a drop of banks’ net interest income by 0.3 percentage points.

"I think banks' balance sheets are healthy and my view is it is possible for banks to take a small hit on the balance sheets," he said.

"RBI is concerned with liquidity. That is a legitimate concern. The hike in will suck out about Rs 16,000 crore of excess liquidity," Chidambaram said.

The RBI has set a target of 24 per cent credit growth during 2007-08 and Chidambaram said this would take care of the credit requirements of all productive sectors.

Chidambaram said banks were agreeable to raising the level of lending to minorities to 15 per cent from the current nine per cent of the total priority sector credit over the next three years.

The government has identified 103 districts where there was a concentration of the minority population. Chidambaram said that banks had agreed to open more branches in these districts.

The finance minister also ruled out resorting to the earlier policy that allowed banks to earn interest on CRR deposits.

"There has been an amendment in the (RBI) Act. RBI has taken a decision that there will be no interest paid on CRR balances. There is no plan to revisit that decision," he said.

The RBI Act 1934, which was amended last year, had done away with the policy of paying interest to banks on deposits parked with the RBI. In the earlier policy, banks could earn about 3.5 per cent interest on CRR deposits.

Chidambaram said that the performance of public sector banks were satisfactory by all parameters.