Fixed Deposit rates begin upward climb

If you have spare cash, here’s the good news. Bank fixed deposit rates are on their way up, and things can only get better as we move into 2010-11.

HDFC Bank raised interest rates by 25-150 basis points (one basis point equals one-hundredth of 1%) across various terms on February 19, and more banks are planning to follow suit. The public sector Union Bank of India is expected to raise deposit rates later this week. Earlier this month, IDBI Bank and ICICI Bank had raised interest rates by 25-50 basis points for some maturities. J&K Bank raised rates by 75 basis points for deposits above one year.

Analysts expect the bigger players to follow suit to remain competitive. “With these rate actions, State Bank of India and ICICI Bank deposit rates are now at a 50-100 basis point discount (for some maturities) and they will now need to follow suit,” wrote Ashish Gupta and Deepak Ramineedi, analysts at Credit Suisse, in a report dated February 22.

The big bankers disagree. OP Bhatt, chairman, SBI, said in Delhi that the bank was unlikely to raise deposit rates before May-June as it had enough liquidity (the amount of free money it had to give out as loans).   

As on December 31, 2009, the bank had a liquidity overhang of a whopping Rs 75,000 crore.

“There is ample liquidity in the system. Hence, at the moment we are not looking at raising interest rates on deposits,” said MD Mallya, chairman and managing director, Bank of Baroda.
But Gupta and Ramineedi of Credit Suisse feel that “as loan growth (14.8% currently) accelerates and the central bank starts tightening money, this liquidity will also dry up soon.” Banks’ deposit growth rates have been falling and hit a four-year low of 17% recently. Rates will have to rise if lending picks up.