Inflation plunged, forcing banks to reduce deposit rates

For the first time in the last 30 years, the bankers are divided and the Reserve Bank of India have cut its benchmark policy rates. Due to  negative pomposity, the real interest rates in money market are rising high. Whereas, the good news is that for home, consumer and industry loan lenders, some of the banks will not wait for the signal from RBI before they start cutting down the borrowing and deposit money.

UCO Bank chairman S K Goel said that the Interest rates should definitely come down. We will take a look and then decide that how much deposit and lending rates can be cut. According to his calculation, the interest rates will be able to reduce by atleast 100 basis points. The Canara Bank chairman A C Mahajan also said that the interest rates are decreasing. As for the depositors, it is not a  good news.

Few of the banks have decided to drop down their interest rates such as HDFC Bank has decided to cut down its deposit rates upto 25 basis points whereas, the Largest branch of State Bank of India of Bikaner and Jaipur, has also reduced its deposit rates upto one percentage point.

The one-to-two year peak deposit rate has been reduced by 100 basis points to 7.25%.  The expansive observed Wholesale Price Index (WPI) fell down to 1.61% in the 12 months to June 6 which bychance makes India the only country of the world with a negative inflation rate, whereas in Europe, the demand has been reducing. India is not facing a decrease in industrial output which remains positive and the inflation rate measured by the consumer price index (CPI) still stands at around 8% and shows no signs of pause.

The present condition of low inflation is mainly in the context of statistical reasons. The annual inflation is measured against prices a year ago. In June 2008, oil was at about $140 per barrel which is almost double of today's price. Similarly, obsolete prices have fallen substantially. This has resulted in the average index of prices of all the goods. While explaining the negative inflation, the finance secretary Ashok  Chawla said that it would not incite the government to change its terms and condition because it had been originate by the base effect and would get corrected.

As per the index of prices of all the goods rose in June-September 2008, the annual inflation rate is hopefully to remain in negative region for the same period. Bankers feel that it will re-enter in positive area in October 2009. The inflation could evict back in the third and fourth quarters of this year.