Fun time come `deposit' time

Anup Menon

FOR INVESTORS looking at investments options in bank deposits, December was eventful.

Bankers reduced deposit rates on short-term deposits and the IMD inflows ensured that liquidity prevailed in the call money market. With excess supply, the short-term cost of funds in the call market was lower, prompting a few banks to reduce short-term rates. A similar decline was not seen on the longer maturities. Meanwhile, inflation rates are rising. Will real interest rates tread negative territory?

At the shorter end of the deposit rate curve the gulf between the rates on offer between the private sector and foreign banks has been narrowing. The average rate on offer by foreign banks fell from around 8.81 per cent in November to around 8.50 per cent. For the same time-frame, the average rates on offer by private banks fell from around 8.21 per cent to 8.17 per cent. In contrast, the average rate on offer by public sector banks increased from around 6.71 per cent to 6.73 per cent. The maximum rate on offer during this period fell from around 9.50 per cent offered by a couple of private sector banks.

In the middle end of the interest rate curve, the spreads between the foreign and private sector banks have been widening. For instance, the average rate on offer for a 2-year deposit in a private sector bank yields around 9.91 per cent. This is way ahead of the 8.86 per cent rate offered by foreign banks. For the same time-frame, foreign banks offered an average rate of around 9.44 per cent in November, indicating a steep fall in December deposit rates.

Meanwhile the spread between the rates on offer between public sector banks and foreign banks narrowed. For instance, the average rate on offer by public sector banks worked to around 8.71 per cent, indicating a spread of around 0.15 percentage points with foreign banks.

The longer end of the curve has been relatively stable with the rate differentials converging towards the 10 per cent mark. The average rate on offer by private sector banks increased marginally from around 10.35 per cent to around 10.38 per cent. Similarly the average rate on offer by foreign banks increased from around 9.50 per cent to around 10 per cent. The rates offered by public sector banks have been more or less steady at around 10 per cent.