Rush: Deposit rates will fall fast now Joel Rebello

Saturday, January 03, 2009

MUMBAI: Got some extra cash lying in your savings account? Rush to put it in fixed deposits, for bank rates are set to fall after the Reserve Bank of India (RBI) cut interest rates on Friday for the fourth successive time.

The RBI cut the repo, reverse repo and cash reserve ratio (CRR), its three main signal rates, for banks as part of the economic package to stimulate demand in the economy. The repo (the rate at which the RBI lends to banks) and reverse repo (the rate at which banks park their excess funds with RBI) were cut by 100 basis points (1%) to 5.5% and 4%, respectively.

CRR, or the percentage of total deposits banks have to park with the RBI, has also been cut by 0.5% to 5% effective January 17. This will give banks Rs 20,000 crore of additional funds for lending.

Since they will be flush with funds and are still wary about lending too much, banks will be eager to cut deposit rates to lower their costs. While loan rates will fall in due course, bankers say deposit rates could fall faster.

MD Mallya, chairman and managing director, Bank of Baroda, said interest rates will be realigned. “The CRR cut will infuse liquidity and the cost of funds will come down. The repo rate cut means that both lending as well as deposit rates will come down, but deposit rates will come down before lending rates,” he said.

Bankers say the cuts may take some time to come because most banks had already announced a lowering of rates from January 1. “Rates will come down in a couple of weeks if not in months,” said an official from a private bank.