Will deposit and lending rates come down?

Leading banks like State Bank of India, Bank of Baroda, Andhra Bank, Central Bank of India and ICICI Bank Ltd, have slashed deposit rates in the past two months.

Dec 10, 2014 03:12 IST others Mahalakshmi Hariharan |

Of late banks having slashing deposit rates and bankers are hinting at a fall in lending rates
 
Leading banks like State Bank of India, Bank of Baroda, Andhra Bank, Central Bank of India and ICICI Bank Ltd, have slashed deposit rates in the past two months. The Reserve Bank of India (RBI), in its monetary policy, last week, stated that liquidity conditions have eased considerably in the third quarter of 2014-15 and deposit mobilization has outpaced credit growth.
 
It’s time to check if deposit rates will further fall?
 
If we look at the trend, banks have been predominantly slashing rates for the short term or the one-year period. Currently, one-year deposit rates are in the range of 8.8-9%. Experts note that there could be a further cut in the interest rates in a month or two following rate cuts by the central bank. At the same time, it is quite unlikely that the rates will fall below 8.5% as other government schemes offer similar returns at that level.
 
Should you now invest in fixed deposits (FDs)?
 
Experts note that if you are a conservative investor, who only finds it safe to invest in fixed deposits, them this is the right time to do so. There are expectations of a further slide in FD rates in the next couple of months. The recent fall in money market rates suggests that monetary policy shifts will primarily have a signalling effect for a while. 
 
Should you borrow?
 
RBI has noted that the recent easing of monetary conditions has not translated into lower bank lending rates. However, there is no clear view so far on the sustainability of easy monetary conditions.
 
Interestingly, bankers have also indicated that lending rates are poised for a fall. SBI chairman Arundhati Bhattacharya has said that lending rates will come down when credit picks up and the cost of funds come down. This means that if you were looking for relief on your equated monthly instalments, a cut may be on its way early next year. In case you are keen on borrowing, you stand to gain if you take floating rate loans. Avoid fixed rate loans. It is widely anticipated that lending rate may come down in the next one-two quarters, and so the only way to make the most of it would be to take a floating rate loan.
 
Other options
 
Now that there are chances of interest rates coming down, should investors look at debt funds? Experts say that bond yields have fallen by good 60-70 bps in the past six months. It is a viable option to invest for the long term, for instance, investors could look at opting for income funds, for the next two years, in a mix of government securities and corporate bonds. As pure gilt holdings could be risky for retail investors as these require an active profit booking strategy, income or dynamic bond funds should deliver adequate returns without too much risk.
 
RBI has refrained from cutting rates, however indicated that policy accommodation might start from the start of early next year, if inflation softens. As market rates have softened, a policy rate cut will boost sentiment and enhance confidence on the trajectory of interest rates. Deposit and lending rates may also come down soon, however it is different to time it today. Equity markets will continue to remain robust on the back of foreign inflows and a pick-up in the economic activity. Let’s watch and watch what happens on the rate front…

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