Central Bank raises finance company term deposit rate cap

The Central Bank has yet again raised the ceiling rate of term deposits offered by finance companies after Treasury bill yields started adjusting upwards lately as such deposit rates are tied to 1-year Treasury bill rate.

Finance companies get fresh instructions quarterly, providing them with the basis as to how they must price their fixed deposits. 

According to the latest instructions, finance companies can offer up to 10.11 percent for 1-year term deposits effective from January 1, 2022, in line with the new benchmark average 1-year Treasury bill rate in the previous quarter, calculated by the Central Bank. 

Finance companies are allowed to add up to 200 basis points on the benchmark average Treasury bill rate that prevailed in the last quarter to price 1-year term deposits. 

However, senior citizens aged 60 and above receive an additional 50 basis points for their deposits at the time of placing the deposits or its renewal. At the final primary bill auction held on December 29 for the year 2021, the 1-year Treasury bill rate increased by 23 basis points to 8.24 percent and the average rate would have come slightly below that level as there was some easing in the yields starting from around November after continuously climbing in response to the removal of the yield curbs in place through mid-September. 

Until January 1, 2022, finance companies could offer up to 9.88 percent on 1-year term deposits and thus the new instructions work out to a 23 basis points increase in the maximum rate that can be offered by them. 

There has been a slight ascent seen in both deposits and lending rates in the economy since August after the Central Bank raised its policy rates by 50 basis points.The Central Bank is expected to deliver at least three rate hikes this year to both fend off inflation as well as to ward off the pressure on the rupee, which fell by 7.0 percent in 2021.