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Bankers gear up for higher rate on falling deposits, inflation worries

Saturday, 3 May 2014 - 7:35am IST | Place: Mumbai | Agency: dna

The recent move by Dena Bank to open a two-month window offering a higher rate of 9.15% for 444-day deposits only shows the desperation by banks to raise funds in tight market conditions. Adding to the worry is the possibility of soaring inflation that could lead to a further drop in bank deposits and asset-liability mismatches.

In fact, Dena Bank rates are almost inching towards bulk deposit offer rates of 9.20-9.25% floated through certificates of deposits (CDs) by banks. State Bank of India (SBI), the largest government bank, as well as ICICI Bank, the largest in the private sector, both offer a maximum of 9% rate on deposits for similar periods. One of the main reasons for the significant drop in banks' deposits rate has been the high inflation that eats into returns, bankers said. "There are alternative asset class like triple A institutional deposits and bonds that gives an effective return of over 12%," said K Harihar, head treasury at FirstRand Bank.

This is much higher than the inflation rate of 8.3%.Tax-free (AAA) bonds issued last fiscal carried an interest rate ranging between 8.25% and 8.50%. This effectively implies an equivalent of a 12% pre-tax bond, a big competition to the bank deposit rates, he said, explaining the reason for the shrinkage in bank deposits. In fiscal 2014, public issue of corporate bonds totalled Rs 42,383 crore. Market participants are of the view that the downward move in rates are now certainly clipped and the rates were more likely to rise on account of upward pressure on inflation.

Bankers and economists were of the view that the recent weather forecast of a 65% probability of El-Nino and deficient monsoon hitting India coupled with the already soaring food prices have certainly changed the stable interest rate outlook for the worse. "Prices of milk, pulses, cereals, eggs etc have risen by 7-10% after the recent hailstorm and unseasonal rains in February," said Harihar. "Prices move in anticipation. El Nino and monsoon are two major factors to worry about.

There is a possibility of an uptick (in rates)," he said. In fact, rating agency Crisil, which had a forecast of 6% growth for FY2015 from the 4.9% growth achieved in FY2014, is now taking a re-look on revising its forecast downward.``We had assumed normal monsoon.

"The growth forecast will not hold if El Nino and poor monsoon occur," said, Vidya Mahambare, principal economist at Crisil. As on March 31, 2014, advances and deposits grew in tandem at 13.9% and 14.1%, but deposits grew significantly in October and November last year due to Reserve Bank of India's (RBI) initiative of floating a special three-year deposit scheme for non-resident Indians to attract foreign currency deposits.

The scheme raked in $34 billion because RBI doled out concessions to banks on hedging the foreign currencies. "Upside risks to inflation are higher due to a possible unfavourable monsoon, volatility in prices of food, fruits and vegetables. This means core inflation has to be brought down significantly to bring about a drop in interest rates," Vidya said. "But don't be surprised if core rate does not come down, as supply side constraints continue to dominate," the economist added.

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