With State Bank of India (SBI) lowering savings bank rate to 3.25 per cent, and the latest print of inflation at 3.2 per cent, depositors keeping their money in savings bank account are technically not seeing their money grow.
Inflation is expected to rise from here, and according to the Reserve Bank of India’s (RBI’s) estimates, the consumer price-based index (CPI) could be between 3.5 per cent and 3.7 per cent in the second half of fiscal 2019-20.
That would mean that the money in savings accounts would earn a negative return unless the bank restores its savings bank rate by then, which is unlikely.
In a small way, this is negative real interest rate, but the savings account holders are used to this.
Even in September last year, savings account holders were earning negative real interest rates. The CPI inflation in September was at 3.7 per cent, whereas SBI’s savings account rate was at 3.5 per cent. “People keep money in savings account for liquidity and not for returns,” said a senior banker.
Broadly, negative real interest rate is calculated after deducting inflation from the policy rate. Considering that policy rate is now at 5.15 per cent, the real interest rate of the economy is still positive at 1.95 per cent.
But the savings rate’s fall has a different and serious connotation for savings as a whole in the country and also for senior citizen dependent on interest earnings. At the same time, lower lending rates, essential to give a boost to growth, won’t be possible if deposit rates are not low.
According to a senior SBI executive, interest rates on liabilities (deposits) have come down substantially. “It would create a challenge for banks. This is because depositors may prefer to move part of their money to avenues such as small savings schemes of the government that offer relatively higher returns,” the SBI executive said. This, in turn, would mean that banks may face liquidity issue.
Banks, for a very long time, did not want to lower their deposit rates, citing high small savings rate. However, now the lenders are facing pressure to pass on the policy rate transmission. The RBI, since February, has lowered policy repo rate by 135 basis points, and have now mandated banks to link all fresh rupee loans to repo for a faster transmission. Banks, on their part, want the deposit rates to be linked to repo, too, to manage their asset-liability profile. Since they are not able to do it, the banks are now lowering their deposit rates.
Meanwhile, the argument of small savings rates is not entirely acceptable to the RBI. In a recent interview with Business Standard, RBI Governor Shaktikanta Das said small savings are a different class of instruments, and used for very different purposes than plain vanilla bank deposits.
“Small savings rates do play a role. But, it also needs to be seen from two different angles: one that they are a fiscal support, which the government is giving to certain needy sections. Rates are higher in the senior citizen scheme, or in public provident fund. We must also consider that the overall share of small savings schemes in total deposits is very low. Therefore, it should not play a major role as an impediment to rate cuts,” Das had said.