Commercial banks are bracing for another round of deposit rate cuts over the next few days.
A cut in lending rates, though, may have to wait till the end of the financial year because banks are not willing to compromise on their interest income by slashing rates in the last quarter.
"The 10-year paper yield has dropped below 6 per cent. When we do not earn enough to recover even the cost of money, we have no choice but to cut deposit rates," said the chairman of a bank.
Bankers are also discouraging depositors particularly bulk depositors, who traditionally receive preferential treatment by way of a quarter percentage point higher interest rate.
The Reserve Bank of India, in its October 2002 Credit Policy, cut the bank rate as well as the repo rate by 25 basis points each.
However, since then, the yields on government securities dropped by about 100 basis points. "If we want to remain in business, we will have to cut deposit rates," said another banker.
Among the public sector banks, Bank of Baroda now offers the minimum rate of 6 per cent for long-term deposits of three years and more.
Bank of India offers 6.25 per cent and State Bank of India 6.5 per cent for long-term deposits. Bankers expect a 25-50 basis points cut in deposit rates.
"I will not be surprised if the rates on long-term deposits come down to as low as 5.5 per cent, which is equal to the repo rate now," said a treasury manager in a public sector bank.
Bankers are also preparing themselves for a lending rate cut, though this may not happen very soon.
"The lending rate may not be cut immediately unless there is a repo rate cut by the RBI," said a private sector banker.
Bankers expect the Budget to signal another rate cut and the RBI to respond to it in its April Credit Policy.
"This will clear the decks for a fresh round of downward movement in interest rates. For the time being, we prefer to wait and watch," said another banker.
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