While asking all members to fall in line and lower interest rates on bulk deposits, Indian Banks' Association on Monday said further reduction in term deposits rates for retail customers will depend on a fall in inflation.
Following a decision last month, most banks have agreed to lower the one-year bulk deposits rates to 9.5 per cent though there are a few who are yet to effect the required cuts. IBA expects all members to lower rates over the next few days.
For retail customers, most public sector banks that account for around 70 per cent of the business, have reduced term deposit rates by 50-100 basis points across various maturities, starting On Monday.
The cut will help reduce the cost of funds. "As long as inflation remains above Reserve Bank of India's comfort level, it is tough for banks to cut deposit rates further," said T S Narayanasami, chairman of IBA after a management committee meeting on Monday.
RBI has said that it expects inflation based on wholesale price index (WPI) to moderate to 7 per cent by March 2009 though its comfort level is closer to 5 per cent. According to latest data, WPI-based inflation moderated to 8.84 per cent from a high of over 12.69 per cent a few months ago.
A public sector bank executive, who attended the meeting said, the system flush with liquidity the call rates are quoting below the repo rate. So, banks which have not cut rates so far will do so in the days to come. "It is a less sensitive issue now," he added. After raising up to Rs 90,000 crore (Rs 900 billion) on a daily basis just six weeks ago, banks are now parking surplus cash through the Reserve Bank of India's reverse repo window.
While there is an expectation that liquidity may be under strain once again as companies have to pay the third installment of advance tax by December 15, Narayanasami said RBI has all the tools to mange liquidity.
"We will not have volatility in the interest rates in the run up to advance tax payment. Liquidity will be in place on priority basis," he added.
In addition, banks also agreed to increase the working capital limits for small and medium enterprises to tide over the current financial difficulties. Based on a request from SMEs, they have also agreed to lower the margins and also sanction loans for purchase of generators in states that are power deficient.
Following the cut in lending rates announced last months, banks On Monday lowered deposit rates. The country's largest lender State Bank of India reduced the deposit rates by 50 basis points across all maturities from 91 days to five years to 10 per cent.
Similarly, Union Bank of India, Bank of India, Corporation Bank and United Bank of India too reduced the interest rates on deposits by 50 basis points. However, Punjab National Bank reduces its deposit rates by 100 basis points to 9.5 per cent across all maturities from 91 days to five years.
"It's a matter of demand and supply. When the credit cycle was tight, we had to offer higher rates, but now with adequate liquidity in the system deposit rates are bound to come down," said Union Bank Executive Director, TY Prabhu.
