An SBI surprise
State Bank of India’s decision to slash returns on its savings bank deposits is important as interest rates on these are the stickiest in the Indian financial system
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Interest rates paid on savings bank deposits are the stickiest in the Indian financial system. They rarely change, even while rates on all other types of deposits, bonds and loan products move in tandem with economic cycles.
The decision by State Bank of India to slash returns on its savings bank deposits by 0.5 percentage points—from 4% to 3.5%—is thus important, especially if more banks follow suit.
The Reserve Bank of India raised the interest rate on savings bank deposits by 0.5 percentage points, to 4%, way back in April 2010. It deregulated these rates around a year later, but other than a few private banks which offered juicy returns to grab market share, most banks kept savings bank rates constant over the past seven years.
What has changed? There are two possible reasons. First, banks think the decline in inflation is now entrenched. Second, they believe demonetisation has led to a permanent increase in household preference for bank deposits over cash. Both are indications of a profound structural shift in the Indian economy.