The recent hike in interest rates on fixed deposits, limited mostly to short-duration offers, can be short-lived, say bankers. The move to garner more deposits by offering up to double-digit rates this month is primarily because it is the end of this financial year when banks try to meet their annual fund targets. This, the industry calls the “March effect”. In fact, it is the February effect. In a study of deposit behaviour over the past 13 years, we found that barring 2000, in every year there is a sharp spurt in deposit growth during the month of February (see chart). In February 1999, for instance, the spike was as high as 15.2 per cent. Since then, the quantum of the rise has fallen, from 14.3 per cent in February 2001 to 8.4 per cent last year. Figures for this year are awaited but already, deposit rates in the past two months have shot up by 1-1.5 percentage points. IndusInd Bank is offering 10 per cent (10.5 per cent to senior citizens) on its 100-day deposits. Bank of India is offering 9.5 per cent for three years with a minimum lock in duration of 400 days, while Kotak Bank is offering 9.5 per cent for one year and above. “Banks are offering rates ranging between 9 and 9.5 per cent because the current supply of money is tight,” said Maninder Juneja, head of retail liabilities at ICICI Bank. “Asset growth is about 30 per cent, whereas deposit growth is about 20 per cent. To correct this mismatch, banks need money in the short term.” But there are other reasons that point to an April cut-back. The March-end factor is important, said Ashish Parthsarthy of HDFC Bank. “Last year, the rates rose by about 100 basis points from the preceding three to four months. This year the rise has been more than 200 basis points for large value deposits.” He said that other factors like the tightening of monetary policy and good credit growth are also fanning interest rates. Bank officials also said that the hike was in response to the 50 basis point increase in cash reserve ratio (CRR) to 6 per cent on February 13. While another round of monetary policy tightening is in sight, banks feel it will not further inflate interest rates. “It is customary to see a slowdown in credit growth during the first half of a financial year. Even if there is a hike in the CRR, it is unlikely that deposit rates will rise,” Parthsarthy said. “The idea is to control liquidity, and once this is achieved, rates will come down.” He expects deposit rates to come down by 100 basis points next month. Kotak Bank’s K V S Manian agrees, “Rates are likely to ease by at least half a percentage point in the first half of the next financial year.”
