It seems that the decline in fixed deposit rates may be ending soon. A bottoming out by September is being expected (and the figure could touch) to 18.2% by March 2011.
The current growth in bank's fixed deposits is way below comfort levels. If this continues, the full-year target of 18% won’t be reached.
RBI’s projection takes into account the resource needed to meet credit offtake by the private sector and government borrowings along with growth and inflation outlook. Not only are government borrowings high this year, credit growth is also expected to be higher than last year at 20%.
Interest rates on deposits are too low now and in some time banks would have to consider their sources of funds and take a decision on deposit rates so that they are in a position to meet credit growth targets.
There is an upward bias in deposit rates because banks will need money to meet credit demand. Union Bank of India has already revised its interest rates on bulk deposits for 1 year to 6.5% from 6% earlier. It had revised its retail deposit rates to 7.5% for 5 years, 7.25% for 3 years and 6.5% for 1 year in mid-April and is continuing with these rates for now and will take a call when markets start showing signs of liquidity crunch.
With inflation expected to ease out by this financial year end, it is expected that RBI will dilute liquidity tightening. The RBI may hike policy rates by 25 basis points in July and October each unless the European contagion spreads.
Easing inflation will also help in cutting the cash demand. Public cash demand is also expected to scale down as softer inflation reduces the demand for money for day-to-day transactions.
Ample liquidity appears to have drained out to someextent as banks have started borrowing from RBI under the repo window daily to meet their creditdemands.
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