India’s savers should brace for more pain in this round of rate cuts

The covid-19 pandemic has prompted policymakers to rush to protect the borrowers from its impact. Inadvertently as always, the savers of the country will be collateral damage.

One sign of this is the falling interest rate on deposits of the country’s largest bank, State Bank of India (SBI). The unprecedented surplus liquidity, rush to safety of deposits and the policy rate cuts so far has meant that SBI has axed its deposit rates twice in just a month now. Its one year deposit rate is at its lowest in 17 years.

It is natural that most other banks would follow suit and cut deposit rates now. To be sure, the weighted average term deposit rate declined by 53 basis points between January and March. “In the banking space, we see that the PSBs, while transmitting the repo rate cut, have tried to minimise the cut in term deposit rates to have minimal impact on the depositor. Meanwhile, for private banks the deposit rate cuts have been more aggressive than the MCLR cuts,” economists at SBI wrote in a note.

The most sticky savings deposit rate too is now vulnerable. This rate was deregulated in 2011 and banks were allowed to cut it. SBI’s savings deposit rate is down to 2.75% now which is lower than headline inflation. In other words, if you leave money in your savings account, it is losing value everyday due to inflation.

Does this mean that Indians will now start to borrow and save less?

The odds of this are low. One, despite a more relaxed lockdown, spending is far from pre-pandemic levels. Urban centres that are big contributors to consumption are yet to see both demand and supply of non-essentials. The very fact that individuals are opting for moratorium on loans shows that demand for fresh loans would be minimal now. Further, the increase in currency with the public (16.8% year-on-year as of 8 May) shows that Indians now would want to keep a stash of cash for exigencies.

Besides deposits, household savings also find their way into other financial products such as equity mutual funds and shares. Value of equity funds have plummeted. Although bonds have done well as an asset class, investors have withdrawn from debt funds owing to troubles with the structure of some schemes.

Another avenue where savings go are small savings schemes of the government. There too, interest rates have been chopped. For the fiscal year 2020-21, the interest rates on various small savings schemes have been cut between 70 bps to 140 bps. For instance, public provident fund interest rate was cut to 7.1% from 7.9% for FY20.

It is clear that Indians may end up saving more but earning less on their savings in the current financial year.