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The wait for India Inc to borrow at softer interest rates is likely to end in a few months with banks cutting deposit rates and central bank indicating policy rate cut early next year.
Bankers have maintained that to pare lending rates, the deposit rates need to fall before banks can be comfortable in cutting lending rates.
The country’s biggest banker State Bank of India has cut the retail term deposit rates for deposits below Rs 1 crore with effect from December 8.
Private sector lenders ICICI Bank and HDFC Bank on Wednesday reduced interest rates on retail term deposits.
Effective from November 28, ICICI Bank has reduced the interest rate on retail term deposits with maturity between 390 days and two years by 25 basis points to 8.75 per cent. Following this revision, the bank now offers a maximum of 8.75 per cent interest on term deposits of less than Rs 1 crore (from 9 per cent earlier).
“Deposit rates are coming down as there is lot of liquidity in the market,” KN Reghunathan, General manager, Treasury, Union Bank of India.
Most public and private sector banks have cut their term deposit rates. The reduction in retail deposit rates signals a downward cycle for lending rates going forward. India Inc has been demanding a monetary policy rate cut to reduce lending interest rates.
“Deposit rates have already reduced by about more than 50 bps and it will further go down in the next six months. If we see some reduction in the next policy, only then the yields (on G-secs) would see further decline but they will remain at around the 7.9 per cent level or below 8 per cent till next policy,” said a public sector bank official.
In the April 2012 to July 2013 period, when the RBI slashed repo rate by 125 basis points, banks banks cut their base rates, leading to lending rates.
In the monetary policy on Tuesday, the Reserve Bank of India said it could ease the policy early next year provided inflationary pressures do not reappear and the government controls the fiscal deficit.
Post policy, the Finance Ministry in a statement said it looked forward to the RBI's support in "the revival of growth and employment" while adding it would work with the RBI on reducing inflationary expectations and reviving investment and growth.
At present, companies are borrowing funds by issuing short term bonds at an interest of below banks’ base rate. However, the market is unlikely to see a major increase, a private sector bank official said.
Experts say though the borrowing from the corporate bond market is seeing some growth it still needs to be developed.
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