The Hindu : Business : Bank deposit rates set to decline

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Thursday, Aug 02, 2007
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Bank deposit rates set to decline

Special Correspondent

Interest rates will settle at 8.5 p.c., says Chidambaram

Some banks have already cut rates
Marginal impact
on banks

NEW DELHI: The rate of interest on one-year maturity deposits in banks is set to decline by about half point, as clearly indicated by Finance Minister P. Chidambaram following his meeting with the chairmen of public sector banks here on Wednesday. In recent months, the interest on such fixed deposits had risen to nearly 10 per cent. “Banks may lower deposit rates of one year maturity by 0.5 percentage point... Some banks have already done that and the interest rate has come down to 8.5 per cent. My impression is that it will stabilise at that level,” Mr. Chidambaram said.

Taking the lead in this regard, Bank of India has already reduced the interest rate on one-year deposits to nine per cent from 9.5 per cent. The cut in interest rate has been necessitated following the move by the Reserve Bank of India to tighten money supply by hiking the Cash Reserve Ratio (CRR) by 0.5 per cent to seven per cent as a measure to check inflationary expectations. “[The] RBI is concerned with liquidity. That is a legitimate concern. That is why it raised the CRR by 50 basis points. That will suck out about Rs. 16,000 crore of excess liquidity,” Mr. Chidambaram said.

Referring to the removal of the Rs 3,000-crore ceiling on reverse repo transactions by banks, he explained that it was yet another measure to suck out liquidity. “These two measures will have marginal impact on net interest margins of banks,” he said. The Finance Minister felt that as the public sector banks had a healthy balance-sheet, they would be able to bear the stress. “[The] banking sector has to bear the stress [CRR hike] and help fight inflation,” he said He ruled out the chances of revisiting a legislation that abolished the payment of interest by the RBI to banks for their mandatory cash deposits with the central bank under CRR.

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