Banks expect Interest Rates to stay High

Banks feel interest rates will stay at the current elevated levels for some more time. State Bank of India (SBI) has extended its 9.5 per cent special deposit scheme by another month and Bank of India (BoI) has raised its deposit rates by 75 basis points.

The decisions of the two banks come in the backdrop of an expected increase in demand for credit in the second quarter. The increase in demand for credit over the next few months is likely to see banks rushing to raise resources, which in turn, will exert pressure on interest rates.

A senior Bank of India official was quoted in Business Standard saying: we do not want to be part of the intense competition when banks begin to raise funds timed with the rise in credit demand from October. We expect to mobilize about Rs 16,000 crore through term deposits and low cost deposits (savings and current accounts) by the end of September 2006.

JP Morgan Chase, in a note titled ‘Making sense of volatility in money market rates’, said: “We believe the combination of the RBI’s recent policy choices constrains its ability to fine-tune liquidity management over the very short term, and, accordingly, the central bank tolerates transitory liquidity surpluses.”