According to sources, a few other public sector banks led by Bank of Baroda are also planning to launch floating rate deposits over the next few weeks. The Bank of Baroda board has reportedly cleared the proposal and the bank management is likely to launch the new product soon.

The Reserve Bank of India had allowed banks to launch floating rate deposits a few years back. Taking the message of reforms further, the latest credit policy has allowed banks to float fixed rate loans as well as tenor-linked prime lending rates. No bank has yet launched floating rate deposits.Banks have, however, nowstarted exploring the possibility of launching floating rate deposits thanks to the increasing pressure on the spread (the margin between the cost of deposits and lending rates).

"This could be one of the ways to protect the spread. Each time there is a cut in bank rate, banks respond by cutting their PLR as well as deposit rates. However, while the cut in PLR takes immediate effect the cost of bank deposits does not go down immediately as the new rates become effective only on the maturity of the deposits.

The introduction of floating rate deposits will take care of this (lag effect)," a senior bank analyst said.

"We plan to adjust the deposit rates whenever there is a cut in bank rate. We are ready with the product. We do not need any specific clearance of the bank's board as the Alco (asset-liability committee) is authorised to make changes in deposit rates," SBI chairman Vaidya said.

In effect, the bank is planning to benchmark the floating rate deposits to the bank rate.

Other public sectorbanks which are in the process of developing the product are yet to identify a suitable benchmark to link the deposit rates. "It could be the bank rate or even the individual bank's PLR. We can also link it to the treasury bill yields," said a senior executive of a nationalised bank. Under the floating rate deposit scheme, banks will periodically reset rates on deposits in tandem with the interest rate scenario. However, there will not be any call and put option. This is essential to prevent volatility in deposit liability, sources said.