Deposit rates on the slide, touch five-year lows

Depositors are finding their income shrinking the last few months with banks slashing interest rates.

Interest rates (especially for deposits of up to one year) are down by about four percentage points compared to a year ago. These rates are now closer to levels last seen five years ago.

Currently, the rates for deposits of 15 days to one-year period range from 3 per cent to 6.25 per cent per annum. Five-and-a-half years ago, in March 2004, the peak rates for this period were about 5.25 per cent.

Since then, deposit rates have been on a roller-coaster ride.

Inching up gradually over the next few years, deposit rates touched about 8 per cent in March 2008.

Banks had begun lending more as the economic growth started to accelerate.

They needed to mop up more resources and did not hesitate to push rates up for deposits.

Interest rates in the bulk deposits market (deposits above Rs 1 crore) were correspondingly higher by 0.50-1 percentage point. Deposit rates of one-year tenor shot up to a high of 10.25 per cent a little over a year ago — with the economy still on a roll.

When the global turmoil began and its ripple effects started to be felt in India, GDP numbers were revised downwards, as were loan growth figures. Banks did not need the extra liquidity that they had till the other day paid so much for.

Crisis of confidence


But given the crisis of confidence that struck all investors, bank coffers continued to fill up even when they could find no lendable avenues for the money pouring in.

State Bank of India, for instance, was getting deposits at the rate of about Rs 1,000 crore a day for a few months and was forced to deploy the bulk of the money in the Reserve Bank of India’s reverse repo auctions that earned it 3.25 per cent.

Banks have, therefore, been systematically cutting deposit rates the past few months and rates are now close to where they were five years ago.

State Bank’s one-year deposit will now earn about 5.75 per cent.

Some other banks have cut their rates deeper still. Punjab National Bank, Union Bank and Indian Bank offer about 5.50 per cent for deposits of similar tenor while Bank of Baroda, a few months ago, pruned them to 5 per cent.

Other banks’ deposit rates now hover at 6.25 per cent.