In this setting, there is one incongruous development. PSU banks should ordinarily have been beneficiaries of this `flight to safety'. They should have scooped up deposits on the strength of their in effect unlimited deposit insurance bestowed by the government. However, in recent weeks, several PSU banks have raised deposit rates. These moves need to be questioned. At a time when PSU banks should have been cutting rates in line with the nearly 100 basis points decline in the 10-year government bond, and at a time when PSU banks should have been getting increased deposits simply on the strength of their government guarantee, why should their interest rates be raised
In the worst scenario, these decisons by PSU banks could set off further dislocations in the financial system in their own right, for this places stress on all other financial assets on the economy which have to produce higher returns given that PSU banks are offering higher fixed rates. Further, since an RBI repo cut is widely expected and the point of that is that lenders reduce their rates, high cost deposits do not appear to be the best way to prepare for this change. Will we hear arguments from public sector banks that their costs preclude substantive lending rate reductions That's a scenario the government, owner of PSU banks, should anticipate.