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Posted by: Uma Shashikant on Wed, Jul 28th, 2010

Deposit Rates

The quarterly review of monetary policy released on July 27th is likely to have an immediate impact on the pricing of bank deposits.  There are three reasons why this could be so. First, deposits have been growing at about 14% and credit at around 20% and the gap is expected to persist even after adjusting for credit demand from the telecom sector for spectrum payments. Second, the persistent borrowing through the LAF (about Rs.50,000cr per day) indicates that demand for funds from the banking system has steadily been on the rise. Third, the elevated projection for GDP growth and the increase in demand side pressures indicate a sustained increase in credit demand from banks, providing the confidence to seek deposits at higher rates.

The wholesale deposit markets have already seen action in terms of higher rates, and going forward the deposit rates could be higher.  We could also see issuance of floating rate CDs in line with the expectation of more frequent rate revisions, following the new 6-week calendar for monetary policy review. These developments are likely to enhance the return on investments in short term deposits (CDs) for short term debt funds. 

Lending rates are unlikely to respond immediately, but when base rates are due for revision in October, we could expect them to move up.  

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