The Hindu Business Line : Higher deposit rates

State Bank of India has started offering 10.5 per cent deposit interest (11 per cent for senior citizens) for 1,000-days, which is slightly less than three years. For the others days in the 2-3 years time-bracket, SBI continues to offer 10-10.5 per cent interest.

The deposit interest rate curve of almost all the public sector banks shows downward slope after one year, indicative of expectation of fall in interest rates. Even the Chairman of SBI has more than once expressed that the interest rates are likely to come down in not too distant future.

Inflation is expected to moderate and dip below double digit by the financial year end. Besides, any further rise in cost of deposits cannot be passed on the asset side, as borrowers are already reeling under the high interest regime, without possibly creating ground for higher NPAs and replicating the kind of situation that the US and some other developed economies are battling with today.

The recent Merrill Lynch Report (ironically coming from those who are themselves in trouble!) indicates the possibility of NPA provisions of PSBs going up, neutralising the benefit they may otherwise derive from the fall in securities yield.

While the depositors, particularly the government employees who are getting the arrears as a sequel to implementation of Pay Commission recommendation and senior citizens, would welcome such a move by SBI, it is debatable if the same is prudent. This will set pace for other PSBs too to look at hiking interest rates. The hike in deposit interest rate will further fuel inflation and dampen GDP growth.

Ravindranath Mumbai

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