Banks unlikely to cut rates now

"We will watch the situation for some time and see how things shape up over the next fortnight before taking a decision," said A T Pannir Selvam, chairman and managing director of Union Bank of India.

"Given the uneven playing field with mutual funds, banks will protect their turf to prevent a run on their deposits."

Banks, already facing stiff competition from mutual funds for retail savings, are wary of cutting deposit rates.

Debt mutual funds are able to offer tax free returns of 11 to 12 per cent, while state-run banks offer returns ranging from 4.5 per cent on savings deposits to11.0 per cent on term deposits. In addition, interest on bank deposits is subject to tax. Bankers also said year-end considerations, with theFinancial year ending on March 31, could delay a revision in rates.

"We will take a view keeping in mind that we are only twomonths away from March as we don’T want to hurt the balance sheet at the year end," Pannir Selvam said.

Banks have been unable to accede to demands for lowerinterest rates primarily because of the high cost of deposits, their main funding source. "We have to look at our net interest margins which arealready under great pressure and the realignment may take some time," said R S Hugar, chairman and managing director of Corporation Bank.

Indian banks quote lending rates from 12 to 16.5 per cent for their prime customers. Industrialists have argued that Indian bank lending rates are too high, considering inflation is under three per cent. Analysts said low inflationary pressures influenced the government’s decision to cut rates last week but thiswas a structural change that was unlikely to have an impact in the short term.

"There is sound economic justification for the cut in small savings interest rates since the high inflationary expectations have been considerably weeded out, but there may not be a cut in benchmark RBI rates this fiscal year," said Vasan Sridharan, treasury economist at Standard Chartered Bank.