Bank depositors lose, govt gains most from lower interest rates

Those who keep their money in bank fixed deposits have lost the most from the reduction in policy rates by the Reserve Bank of India


Banks have been reluctant to pass on benefits of the reduction in policy rates in full to customers despite RBI governor Raghuram Rajan’s repeated appeals. Photo: Pradeep Gaur/Mint
Banks have been reluctant to pass on benefits of the reduction in policy rates in full to customers despite RBI governor Raghuram Rajan’s repeated appeals. Photo: Pradeep Gaur/Mint

Who has lost the most from the reduction in policy rates by the Reserve Bank of India (RBI)? Those who keep their money in bank fixed deposits (FDs). Unfortunately, these are usually retired people who depend on the interest to make ends meet. As the chart shows, the interest on FDs of tenures more than one year has come down from around 9% to 7.5% in the last couple of years.

Who has benefited the most? Obviously, lower interest rates have helped borrowers. Among borrowers, though, it is the government that has benefited the most. The yield on the 10-year government security has fallen from 8.7% to 7.5%, as the chart shows. And the government is the biggest borrower.

Yields on 10-year government bonds have fallen by 128 basis points in the past two years, that is, May 2014-May 2016; which is much more than the decline seen in bank lending rates or yields on AAA-rated corporate paper, shows data from the Centre for Monitoring Indian Economy (CMIE). A basis point is 0.01%.

Banks have been reluctant to pass on benefits of the reduction in policy rates in full to customers despite RBI governor Raghuram Rajan’s repeated appeals.

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