The Telegraph
Since 1st March, 1999
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Countdown to deposit rate slash begins

Mumbai, April 29: Banks appeared set to realign deposit and lending rates by 25-50 basis points after the monetary and credit policy brought down benchmark bank rate and cash-reserve ratio (CRR) by 0.25 basis points each.

State Bank of India, Corporation Bank and Bank of Baroda (BoB) are likely to bring down their rates over the next few days in response to the Reserve Bank’s decision, the broad consensus among senior bankers is that a stable interest rate scenario will finally emerge.

State Bank of India chairman A. K. Purwar told The Telegraph that a realignment of deposit and interest rates is in the offing and that his bank will make up its mind within days. He did not say how steep the cuts would be.

Purwar said he envisaged a stable rate regime, barring what he called “accidents” — unforeseen events. The country’s largest bank had, in January this year, brought down the interest rate it offered on its longer-end domestic term deposits by 25 basis points.

Corporation Bank chairman and managing director K. Cherian Verghese said his bank is in course of fine-tuning its deposit and lending rates and a meeting of the bank’s asset-liability committee will be held soon to take a decision. Bank of Baroda officials also said there would be a reduction in its lending and deposit rates in the range of 25 basis points.

Officials of the Central Bank of India, however, said the bank was not considering any cut in its deposit or lending rates.

Though the cut in the benchmark rate and CRR did not surprise most bankers, the prices of government securities dipped — and yields increased — as the RBI indicated that the trend of easing interest rates was over, at least for now. Yield on the benchmark 10-year government security rose by 4 basis points to 5.927 per cent.

The return on government securities have dipped by more than 400 basis points over the past couple of years due to the RBI’s insistence on a soft-interest rate bias. Yields and prices of bonds move in opposite directions.

J. M. Mutual Fund’s Nandkumar Surti said yields on the benchmark paper (10 years) could move between 5.95 per cent-6.05 per cent. He said the immediate direction will be dictated by inflation numbers and the first state government borrowing programme.

HDFC Mutual Fund managing director Milind Barve said the 25 basis points cut in the bank rate is a pointer that the current interest rate scenario will be sustained over the medium term. “Going forward, we should see a trickle-down effect with lower lending rates across the banking sector accompanied by a high chance of a lagged impact on the deposit rates as well,” he added.

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