Barely three weeks after the banks rushed in to cut the deposit rates in the wake of cut in base rate (base rate is the minimum lending rate below which banks could not lend to any borrower), the reverse appears to be happening with the banks starting to raise the deposit rates and put on hold the decision to cut base rate.

What is significant is that this trend has begun ahead of the policy review by RBI Governor D. Subbarao on July 30 and at least one bank Chairman (State Bank of India CMD Pratip Chaudhuri) has openly expressed the view that it is better to hike interest rates rather than smother liquidity with a view to shore up the Indian rupee.

Punjab & Sind Bank rolls back decision

The public sector Punjab & Sind Bank had yesterday announced the rollback of its earlier decision on July 9 to reduce the interest rates by 25 basis points (0.25 per cent).

In a notification to the stock exchanges yesterday, the bank said that it had decided to revise the interest rates on domestic and NRE deposits for various maturity periods with effect from Monday.

The interest rates for deposits of 151-179 days and 180-269 days will be increased from 8 per cent to 8.25 per cent a year.

For deposits of 1-2 years, the interest rate would be increased from 8.75 per cent to 9 per cent and for term deposits of 500 days, the new interest rate would be 9.25 per cent instead of 9 per cent.

With respect to NRE deposits too, the interest rate is being hiked by 0.25 per cent for deposits of 1-2 years from 8.75 per cent to 9 per cent.

It was only on July 9 that Punja & Sind Bank had announced cut in interest rates by 0.25 per cent with effect from July 10 for various maturities.

But the bank then had stated that to attract medium term deposit, it would be paying 9 per cent interest for term deposits of 500 days.

For NRE term deposits, it then announced cut in interest rates by 0.25 per cent to 8.75 per cent for various maturities from 1-5 years. Both the cuts have now been rolled back.

Hike in FD rates

Already another PSU Bank Oriental Bank of Commerce (OBC) had on July 25 announced hike in fixed deposit rates by 0.25-0.75 per cent to overcome the tight liquidity.

For domestic/NRO term deposits of up to Rs 1 crore and for 91-179 days, the increase was the steepest at 0.75 per cent to 8.5 per cent from 7.75 per cent.

For deposits of 270 days to less than one year, the interest rate increase was by 0.25 per cent to 8.50 per cent from 8.25 per cent. Deposits of 180-269 days would earn 8.50 per cent interest against the existing 8 per cent.

For longer deposits from 1 year up to 10 years in different slabs, the interest rate would be 8.75 per cent. The new rates would be effective from July 25, OBC had said.

On July 15, OBC had announced a 0.25 per cent cut in interest rates on select maturities with immediate effect on deposits of Rs 5 crore and more.

Cut in base rate

After Finance Minister P. Chidambaram had urged the banks to cut the base rate early this month, there was a rush by the banks to cut the base rate. PSB also decided to cut the base rate from 10.25 per cent to 9.99 per cent with effect from August 1.

Both PSB and OBC have also decided to put on hold their earlier decision to cut the base rate apparently because the RBI’s policy review on July 30 may set the tone for the interest rate movement in the near future. While OBC was to cut it from 10.25 per cent to 10 per cent, PSB was to cut it from 10.25 per cent to 9.99 per cent.

Short-term borrowings rate

Already the country’s apex bank has raised the rates for short-term borrowings by the banks from it as part of efforts to curb liquidity in the system with a view to shore up the rupee against the greenback.

The havoc the bank stocks have suffered in the past one year could be understood from the price erosion they have suffered, including the country’s premier bank SBI that hit fresh 52 week low yesterday.

Both OBC and PSB dipped to fresh lows yesterday. OBC’s shares have fallen by more than 50 per cent — from a high of Rs 367.50 on December 10 last year to Rs 152.80 yesterday on the BSE. PSB’s shares have declined from a high of Rs 82.30 on Jan 8 this year to a low of Rs 48.80 yesterday.

(This article was published on July 27, 2013)
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