This is the flip side of a falling interest rate regime. When lending rates fall, so do fixed deposit rates—and that’s bad news for those who seek the safety of bank deposits with higher rates.
The highest deposit rates offered by most public sector banks are set to fall below 8 per cent by early February, say bankers.
The Union Bank of India has taken the lead and cut its peak deposit rate by a sharp 135 basis points (1.35 percentage points) to 8 per cent, closer to the rates prevailing in 2003. State Bank of India, the country’s largest bank, still offers a peak rate of 9 per cent on 1,000-day deposits.
MV Nair, Union Bank’s chairman, said it does not make sense to maintain deposit rates at higher levels with the yield on 10-year government bonds (a key signal), falling close to 5 per cent and bulk deposit certificates issued by banks carrying a less than 8 per cent rate.
Deposit rates for one year in 2003 ruled between 5.50 to 6.25 per cent against 8.0 to 8.5 per cent now and home loan rates across the system were in the 8.0 to 9.0 per cent range.
“One also has to see the real interest rate (the difference between current interest rate and current inflation), with inflation falling rapidly,” Nair said. Union Bank is likely to consider lowering its prime lending rate (PLR) this week from the current 12 per cent.
The Reserve Bank, on a drive to release more funds and cut signal rates, is expected to further cut rates at its policy review on January 27.