1 min read.Updated: 27 Dec 2019, 06:36 PM ISTLivemint
Though the suggestion isn’t new, pressure has mounted on policymakers to rescue the economy from its slump, and bankers seem to have thrown their hands up over the question of extending cheaper loans
The Reserve Bank of India (RBI) has reportedly urged the government to align interest rates on sovereign-backed small savings schemes with market rates to help improve the transmission of its monetary policy. These rates are currently about 100 basis points higher than market levels, and act as a floor for banks in setting deposit rates, and this keeps their lending rates relatively high.
Though the suggestion isn’t new, pressure has mounted on policymakers to rescue the economy from its slump, and bankers seem to have thrown their hands up over the question of extending cheaper loans. If they cut deposit rates any further, they fear, depositors would shift to alternative investment avenues. State Bank of India chairman Rajnish Kumar last week said banks couldn’t lower deposit rates beyond a point, citing their dependence on retail deposits. In the case of SBI, he said, they formed 90% of its deposits.
To be sure, the government has been edging small savings rates down, bit by bit. If it aligns them fully, a vulnerable section of citizens, including retired folk and others who depend on such savings, could find themselves with less money than they had expected. This is why the Centre resists cutting these rates, even if it blunts the effect of RBI’s policy rate cuts. Now that the economy has taken a grim turn, however, the government may need to take the central bank’s advice. It could explain the importance of cheaper credit to savers, and they may accept that sacrifices need to be made by everyone.