The Telegraph
Since 1st March, 1999
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BoB move sparks hopes of higher deposit rates

Mumbai, Feb. 10: The Bank of Baroda’s decision to raise its deposit rates by 25-50 basis points has thrown up the question whether the fall in interest rates on bank deposits over the past couple of years has finally bottomed out.

However, according to bankers, barring a wobbly bond market over the last few days due to fears of an impending war in Iraq, there are no definite signs that interest rates on deposits have bottomed out and that they could be on their way up.

“Deposit rates is a function of liquidity. Currently, liquidity is ample in the system with even the inter-bank call money rates being comfortable. Therefore, there is no need to be worried,” says N. Balasubramanian, vice-president, ICICI Bank.

BoB on Saturday said that it is raising interest rate on deposits as yields on the benchmark 10-year government security have touched 6.40 per cent from a low of over 5.80 per cent, last month. Yields on government securities have risen from an all-time low as war fears have raised fears of high inflation due to rising oil prices.

While yields on the benchmark 10-year security was close to 6.60 per cent levels today, analysts believe gilt prices will rally in the event of a war as this possibility has been discounted. However, most of the bond market analysts feel that there should be a 15-25 basis points movement both ways of government security yields soon.

BoB announced that interest rates on deposits maturing between 15-45 days have been raised to 4.75 per cent from 4.50 per cent. Similarly, interest on deposits between 181 days to less than a year have been raised to 5.75 per cent from 5.25 per cent and for deposits above one year to 6 per cent from 5.5 per cent.

Commenting on BoB's move, an official of a leading private sector bank said, “The nationalised bank is being too hasty and aggressive in pegging its rates below leading banks when interest rates were on their way down. The current round of revision is only to stop a flight of depositors to other banks.

“The bank is only aligning its interest rates with that of other banks when it raised them last week. It is too early to say whether a trend has emerged of interest rates rising from their current levels,” said another banker.

According to Sanjeet Singh, vice-president of ICICI Securities and Finance Company, interest rates in the short-term will depend on the state of the economy. “If there is not much change in the economic conditions over the next 2-3 months, then it will be very difficult for interest rates to fall further,” he adds.

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