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Banks' Deposit Rates Fall

From their highs, depositors have seen bank deposit rates fall to extreme lows

Depositors with various banks seem to be at the crossroads. With banks slashing interest rates in the past few months, investors are increasingly finding that any investments they wish to make will give off less returns than were available earlier.

Rates of interest that banks are offering, mostly for deposits of up to one year, have registered a fall - they dipped some four percentage points from the year-ago figure. The rates have come close to levels which were seen around five years back, reports Business Line.

Presently, for deposits of 15 days to a one-year period, rates vary from three per cent to 6.25 per cent - in March 2004, peak rates were around 5.25 per cent.

However, the rates started going up slowly over the next few years and reached as high as eight per cent in March 2008. Spurred by the acceleration of economic growth, banks had started lending more and that meant they needed to ramp-up deposits too, which became a windfall for depositors.

Bulk deposits, generally Rs 1 crore and above, were correspondingly higher by 0.50-1 percentage point. Even for the one-year period, deposit rates increased to as high as 10.25 per cent, a little over a year ago due to the buzzing economy.

However the loan growth figures as well as the GDP numbers started getting revised downward, especially after the effects of the global turmoil started to make inroads into India at a faster pace. This was because banks did not need the extra liquidity as credit growth, especially from corporates had fallen to its nadir.

Bank coffers meanwhile continued to fill up as there was a dearth of avenues for lending the money which was still constantly pouring in.

Depositors were still running to banks with their money. State Bank of India, for example, was getting deposits at the rate of around Rs 1,000 crore per day, but was forced to deploy the bulk of the money with the Reserve Bank of India that earned it just 3.25 per cent.

Therefore, over the recent times, there has been a systematic cutting of deposit rates - State Bank’s one-year deposit will now earn something around 5.75 per cent.

If one talks about others, there are banks which have cut rates even further. Some of the examples are Punjab National Bank, Union Bank and Indian Bank, which as of now offer around 5.50 per cent, while Bank of Baroda, a few months back pruned them to 5 per cent. Other banks’ deposit rates presently hover around 6.25 per cent.

Considering that inflation is fast expected to top the best rate being offered by banks, what depositors are looking at today are negative overall returns. Is that a clarion call for investment in equity as stock markets have been rising fast over the last 7 months, virtually doubling in value?

Take a call on it.

Rate History (in %)
Mar-04 3.75-5.25
Mar-05 2.75-6.00
Mar-06 2.25-6.50
Mar-07 2.75-8.00
Mar-08 2.75-8.00
Jun-08 2.75-9.00
Sep-08 2.75-10.25
Dec-08 2.75-10.25
Mar-09 2.75-8.25
May-09 2.75-7.50
Oct-09 3.00-6.25
Source: Business Line