State Bank of India slashes deposit rates after CRR hike
By Ankit Sharma
Nov 5, 2007
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New Delhi: The increase in CRR by 50 basis points by Reserve Bank of India (RBI), has started to affect the deposit rates. Few banks like the Centurion Bank of Punjab, Union Bank and Bank of Baroda had reduced the interest rates on deposits a few days back and now, State Bank of India (SBI), the largest public sector bank in India has announced a reduction in interest rates offered on 550 day deposit.

SBI has decided to cut the interest rate by 25 basis points on this deposit. This reduction will take effect from November 9. The move was expected as the increase in CRR, has affected the bank's net interest margins. With, little or no possibility of increasing the interest rates on home and other retail loans in the near future, SBI had little option but to reduce the rates on its various deposit schemes.

SBI has also withdrawn few deposit schemes. The super-saver term deposit scheme, which offered a 9 percent interest for a minimum deposit of Rs.10,000 for tenures 4-5 years and 8.5 per cent for deposits over 5 years will no longer be available.

The revised deposit rates (w.e.f 07-11-2007) from SBI for various tenures are listed below:

Duration Interest Rate (%)
15-45 days 5.00
46-270 days 5.50
271 days to less than 1 year 6.75
1 year to 549 days 8.00
550 days 8.75
551 days to less than 2 years 8.00
2 years to less than 3 years 8.25
3 years and up to 10 years 8.50

The third quarter may witness the bank's cost of funds to increase by 5 to 15 basis points. A senior official of SBI said, “With the CRR hike, Rs 2,500 crores of funds would get locked in. Also, in the second quarter, there has been pressure on the bank’s margins, leading to a review of deposit rates.”

Similar rate cuts are also expected from other major players in the market. The banks are feeling the pinch of CRR increase and the resulting increase in cost of funds will force them to cut the deposit rates. 

The RBI had increased CRR by 50 basis points to reduce the liquidity in the market. RBI left the repo, reverse repo and bank rates unchanged. The RBI increased the CRR to reduce the excess liquidity in the markets. They have seen massive foreign fund inflows from September 18 onwards after the rate cut announcement by the Fed. This week again, the Fed announced a 25 basis points cut in interest rates.  

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