Liquidity crunch in the system has started pushing banks to jack up interest rates on short-term deposit rates. Indias largest lender State Bank of India on Tuesday raised fixed deposit rates on select maturities by up to one per cent amidst a sharp rise in bond yields.
Fixed deposits with maturity period of 7-90 days will earn eight per cent interest against existing seven per cent,SBI said. The new rates would be effective from Wednesday. Interest rates on 91-179 day and 181-240 day period fixed deposits have been raised by 0.75 per cent and 1 per cent,respectively. The rate of interest will be 8 per cent now. Interest rate on 241-day to one-year deposits has been raised by just 0.25 per cent to 8 per cent.
The bank has left interest rates on fixed deposits beyond one-year maturities unchanged. SBI becomes the fourth public sector bank to increase fixed deposits rates this month,a move others will follow. Earlier this month,Bank of Baroda and Bank of India had also raised deposit rates.
Though these banks raised the rates on short-term deposits,it will work against an immediate decline in lending rate. If the cost of funds remains high,bank wont be in a position to slash lending rate. Both lending and deposit rates will have to decline together. The RBI will have to cut cash reserve ratio further and start bringing down repo rates in order to bring down the cost of funds, said an official of a nationalised bank.