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Things got worse for savers as deposit rates dip in May

While rates may not climb up unless the RBI specifically signals unwinding its loose monetary policy stance, interest rates are unlikely to ease further. (Photo: Mint)Premium
While rates may not climb up unless the RBI specifically signals unwinding its loose monetary policy stance, interest rates are unlikely to ease further. (Photo: Mint)

Discretionary spending has taken a big beating and a recovery is far off. What this means is that household savings will continue to grow and unless there is a sharp shift from deposits to other financial instruments, real returns would remain depressed

The pandemic’s worst effect has been on India’s savers. The sharp drop in interest rates on new deposits in May and the surge in retail inflation is a stark reminder that real interest rates are moving even deeper in negative territory. In May, retail inflation was 6.3%, while the average interest rate on new deposits, as calculated by analysts at Nomura, was at 4.38%.

“New deposits are coming in at least 100 basis points lower than the cost of deposits outstanding, but the gap has narrowed over the past few months, indicating tighter conditions. Unlike lending rates, banks have been very specific about reducing deposit rates and that is visible in their spread over repo rate," a note from the brokerage firm said.

Data from the Reserve Bank of India (RBI) shows that the weighted average term deposit rate has fallen by more than 100 basis points from pre-pandemic levels. At the same time, growth in bank deposits has been faster than before.

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One basis point is one-hundredth of a percent.

Indians were forced to save last year after a nationwide lockdown put a hard stop to spending beyond the basics. To be sure, when restrictions were lifted, the drawdown on savings has been sharp as well. However, the second wave of covid-19 infections and the threat of a third one has meant that people are unwilling to increase spending. A look at the central bank’s consumer sentiment survey shows that discretionary spending has taken a beating and recovery is far off. What this means is that household savings would continue to grow and, unless there is a sharp shift from deposits to other financial instruments, real returns would remain depressed. The share of bank deposits in household savings is more than 50% as of March. To be sure, deposits have ceded their share to other financial instruments during the second wave.

At the same time, retail inflation is expected to be around 5.1%, as forecast by RBI, for FY22. Savers will be at the receiving end again.

Of course, banks have benefited hugely from this trend. Net interest margins have remained stable and even increased due to the drop in deposit rates. In May, the gap between the weighted average term deposit rate and the weighted average lending rate on outstanding loans remained stable at 3.84%. Private sector banks have been the biggest beneficiaries as they ran down high-cost deposits in a falling interest rate regime.

That said, lending rates have bottomed out, said analysts. While rates may not climb up unless RBI specifically hints at unwinding its loose monetary policy stance, interest rates are unlikely to ease further. Historically, deposit rates have been the last to respond to tightening monetary policy conditions. Ergo, it will be a while until real returns begin to be positive for depositors in India.

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