Whether it is because they have limited opportunities to lend, or because they want to lower the cost of borrowings, banks have been lowering interest rates on deposits fairly frequently over the past one year. SBI now offers just 7.15% for one-year money while HDFC Bank and ICICI Bank offer 7.25%; these lenders have dropped the rates over the past month or so. That is bad news for savers who, post-tax, are now earning a negative real rate of return even though consumer inflation has eased significantly. But it is not surprising that banks are dropping deposit rates given that from levels of 7.465% in early April, the yield on the benchmark has dropped to 7.121% in early September and further to 6.88%—as per the new series—on Tuesday.
Given this, it is surprising that the government continues to offer fairly high rates on small savings schemes in post offices. The Public Provident Fund and the National Savings Certificates that are sold in post offices, for instance, still offer an 8.1% return while SBI offers 7% for three- to ten-year money—and this is when the interest earned on SBI deposits, like those for all banks, are not only taxable, but also taxes are deducted at source. It is precisely because such a high divergence in rates will hit the ability of banks to garner deposits—it may not matter right now with lending growth low, but it will as the economy picks up and banks need to lend more—that the government had said in March that postal interest rates would be reset every quarter based on the G-sec yield; the earlier practice was to set them every 12 months. While the fall in benchmark rates may not have been very meaningful in the April-June quarter and the government got away with not adjusting post office savings rates, there has certainly been a sharper decline in the three months to September. There is no reason for the government to offer one group of savers 300 basis points over consumer inflation which is running at 5%—to the extent borrowers are chasing higher returns, they are free to invest in debentures and shares which, all evidence suggests, they are in any case doing now. Moreover, there is an opportunity here to bring down the government’s interest bill as well.
The government’s reluctance to follow up on its own proposal to reset rates every quarter is odd since interest rates falling will stimulate demand for credit—at least on the retail-side like housing loans even if industrial demand is hobbled by factors like excessive leverage and excess capacity. Indeed, the central bank’s plan to infuse liquidity into the system is also aimed at aiding transmission of its cuts in the repo rates. But if banks are reluctant to cut deposit rates due to competition for retail deposits from post offices, they simply can’t reduce lending rates beyond a point either. That cannot be in anyone’s interest.