From THE HINDU group of publications
Sunday, July 08, 2001


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Possibility of deposit rate cut strong

WITH the possibility of an interest rate cut looming large, the likelihood of a further cut in bank deposit rates looks strong.

Therefore the prevailing deposit rates may be a good investment option for ardent investors in bank deposits. Given the present level of inflation, the returns on an investment in a bank deposit is marginal. However, judging by the present trends in the economy as a whole, safety is a critical issue and bank deposits are relatively safer. Thus investors may be better off in making investments at current rates and locking into a higher rate of return.

At the shorter end of the deposit rate curve the gulf between the rates on offer between the private sector banks and foreign banks have narrowed considerably. For instance, the average rate on offer by foreign banks is around 8.17 per cent for a six month deposit. In comparison, the average rates on offer by private sector banks is marginally lower at around 7.95 per cent. For the same time frame the average rates on offer by public sector banks is around 6.79 per cent. At the shorter end, investors have options of locking into a higher interest rate. For instance, the maximum rate on offer in this period is around 9.50 per cent offered by a foreign bank.

In the middle of the curve the private banks rule the roost as the deposit rate differential is in their favour. For instance, the average rate on offer by private sector banks for a two-year deposit is around 9.56 per cent. As against this, foreign banks offer around 8.86 per cent followed by the public sector banks which offer around 8.49 per cent. The maximum rate on offer in this segment is 10.50 per cent offered by a private and a foreign bank. Investors can seriously consider investing in medium-term deposits as the rates are comparably attractive.

As usual the rate differentials at the long end of the curve are quite narrow. The rates on offer by the private sector are the highest in the segment. The average long-term deposit rate for private sector banks works out to around 9.89 per cent. Surprisingly, the average rate on offer by public sector banks are higher than that of the foreign banks. Public sector banks offer around 9.66 per cent against 9.33 per cent offered by private sector banks. Given the marginal difference in interest rates on offer, investors may well consider shorter maturities rather than locking funds for the long-term.

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