BULK deposit rates—interest on deposits of over Rs 1 crore—have come
crashing down following surplus liquidity in the system. Banks are
offering rates as low as 1% on one week deposits and 5% on one-year
The liquidity overhang is on account of no auction being held in the first six days of the current fiscal year (FY10) even as RBI redeemed Rs 40,000 crore of government paper. Also, liquidity tends to rise in an election year due to increased government spending.
Market observers say the huge liquidity in the system is forcing banks to discourage bulk deposits. Punjab National Bank has lowered its card rate on bulk deposits from 6.5% to 5% and is accepting seven-day deposits at 1%. This is among the lowest rates offered by any bank.
In the beginning of this year, the Indian Banks’ Association had fixed a uniform rate of 7.5% on bulk deposits for public sector banks. However, with rising liquidity in the system, many banks were offering lower rates of 6.5-7%. A mid-sized south-based bank mobilised Rs 1,000 crore by offering 3% for one week. The depositor agreed on such low rates partly because the interest that would accrue by parking the money in the current account would be much lower. Also, the minimum tenure for a fixed deposit is only seven days.
Treasury heads say interest rates on bulk deposits had marginally increased to 8% in the last week of March due to pressure on banks to meet their deposit targets. However, rates have eased thereafter.
Market observers say despite Rs 18,000 crore expected to be sucked out of the system this week by sale of dated g-secs and treasury bills by RBI, buyback of government paper and the fact that banks are usually not aggressive in lending in the first week of a new fiscal will ensure liquidity remains high.
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