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Short-term SBI deposits to fetch less

Mumbai, Aug. 7: In a move that took everyone by surprise, State Bank of India (SBI) today announced a 25 basis points cut in its interest rates for short-term domestic deposits, effective August 9. The bank, however, left long- term rates untouched.

“Our rates were not in alignment with the market and hence we have taken this decision,” SBI chairman A. K. Purwar said. The reduction is being seen as a pointer to the fact that over the short term, interest rates are expected to remain soft though in the long run they may rise.

SBI said the interest rates have been revised downwards on short-term deposits of maturity between 15-45 days and 46-179 days by 0.25 per cent to 3.75 per cent per annum and 4.25 per cent per annum, respectively.

SBI's move may force other commercial banks to bring down interest on their deposits as well. At present, most of the nationalised banks offer an interest rate of 4 per cent for deposits of 15-45 days, 4.25 per cent (some banks like Bank of India offer 4.50 per cent) for deposits of 46-90 days and 4.50 per cent for deposits of 91-180 days.

A BoI official said any decision on interest rates on deposits will be taken by the bank’s asset liability committee.

SBI’s move came as a surprise as it is generally expected that interest rates are on their way up due to the creeping inflation rate that has now touched 7.51 per cent and rising global interest rates.

Early this week, the Housing Development Finance Corporation (HDFC) jacked up interest rates on its fixed-rate housing loans by 25 basis points.

However, bankers have an explanation for SBI's move. They point out that although long-term interest rates have risen as seen by the yields on government securities, those at the short-end are not exhibiting such signs and have instead stabilised.

“SBI's move indicates a move towards re-alignment of interest rates. It shows that while short-term interest rates will remain soft, they are hardening if we have a long-term perspective,” a senior official with a leading private sector bank pointed out.

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