Will deposit rates be hiked?

Anup Menon

THE full effect of the Reserve Bank of India's (RBI) move to hike interest rates on bank deposits has been felt during the month. Though short-term rates were expected to move up, it did not materialise. However, with the RBI stating that there may be no further hike in the near future, the pressure on banks to increase rates has come down to some extent.

At the shorter end of the deposit rate curve, the rate differentials between the private sector and foreign banks continue to remain marginal. However, on an average, there has been no major change in the interest rates on offer in this segment.

The average rate on offer for a 179-day deposit in a foreign bank works out to around 8.61 per cent, compared to 8.15 per cent offered by private sector banks. The public sector banks are way behind with an average rate of around 6.49 per cent, 1.66 percentage points below the private sector banks. The maximum rate of offer in this segment is around 9.50 per cent offered by Global Trust Bank.

In the middle of the curve, the private sector banks offer better rates than the foreign banks. For instance, the average rate on offer for a deposit between one and two years in a private sector bank would yield approximately around 9.85 per cent as against 9.25 per cent offered by foreign banks for the same maturity. The public sector banks are not far behind. For the same maturity, the average rate of interest works out to around 8.61 per cent. The maximum rate on offer in this slab works out to be 10.50 per cent offered by a couple of private sector banks.

At the longer end of the curve, the rate differentials are not very significant. Private sector banks offer the highest average returns in this segment with a rate of around 10.33 per cent. Overall, the average rates in this segment tend to converge towards the 10 per cent-mark. This situation has prevailed for a fairly long period and may continue to remain so.