Money & Banking

Fixed deposit rate hike, a remote possibility

G. Naga Sridhar L.N. Revathy Hyderabad/Coimbatore | Updated on October 25, 2011

Scraping the ceiling: A cashier checks currency notes at a bank in Agartala. Bankers say increasing cost of deposits have affected margins, almost ruling out the possibility of a raise in deposit rates. (file photo)

The interest rate on fixed deposits in banks may not go up with the RBI increasing the repo rate by 25 basis points.

Banks generally revise interest rates on deposits and advances whenever the central bank increases the repo rate.

However, this time bankers say that the deposit rates have already peaked leaving little scope for any upward revision.

At present, the interest on term deposits between 46 and 60 days is in the range of 5 per cent to 8.50 per cent. It is between 8 per cent and 10.50 per cent for varying periods from six months to five years, and bankers say that this range is the maximum in view of the increasing costs of deposits.

There are other factors that make hiking deposit rates a remote possibility.

The credit growth during the first two quarters was sluggish which means a rather humbled growth in net interest income and net interest margins.

The apex bank also observed that planned corporate fixed investment in new projects declined significantly since the second half of 2010-11 and has stayed low in the first quarter of 2011-12.

Consequently, the pipeline of investment is likely to shrink, putting growth in 2012-13 at risk. This would make credit offtake a tough proposition for banks.

Further, to push up retail advances, banks are also offering some concessions and incentives which will add up to the cost of funds.

Any increase in deposit rates in these circumstances might lead to an additional burden adversely impacting the profitability.

Most of the banks had revised deposits rates during August-September and claim that today's hike in repo and reverse repo rates has already been factored.

So, while you may have to pay a little more interest on loans, the earnings from your term deposits are unlikely to go up immediately.

Published on October 25, 2011

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