1. As SBI drops rates, real interest rates are now negative

As SBI drops rates, real interest rates are now negative

In spite of consumer inflation falling to a five month low of 5.05% (y-o-y) in August, with State Bank of India dropping deposit rates further, real interest rates are now well and truly in negative territory, reports Shakti Patra in Mumbai.

By: | Updated: September 19, 2016 7:43 AM
 SBI has lowered deposit rates from September 1 and offers just 7.15% for one year money which, after a 30% tax rate, yields just 5%. (PTI) SBI has lowered deposit rates from September 1 and offers just 7.15% for one year money which, after a 30% tax rate, yields just 5%. (PTI)

In spite of consumer inflation falling to a five month low of 5.05% (y-o-y) in August, with State Bank of India dropping deposit rates further, real interest rates are now well and truly in negative territory, reports Shakti Patra in Mumbai. SBI has lowered deposit rates from September 1 and offers just 7.15% for one year money which, after a 30% tax rate, yields just 5%. Two other large lenders, ICICI Bank and HDFC Bank offer a little more—7.25% for a one-year deposit. Interestingly, Kotak Mahindra Bank offers 6% for a savings account balance; almost all banks offer 4%.

Real interest rates had turned positive once inflation started easing but now that banks have been lowering deposit rates continuously for two years, they’re negative once again. However, currently real rates are only marginally negative whereas at one time a couple of years back, they were negative by 300-400 basis points. Meanwhile, the deposit base with banks in India is nudging the Rs 100 lakh crore mark; at the end of the fortnight ended September 2, it touched Rs 98.6 lakh crore.

graph sbi

Raghuram Rajan, former Reserve Bank of India (RBI) governor, had pointed out that in the last decade, savers have experienced negative real rates over extended periods as Consumer Price Index has exceeded deposit interest rates. “Savers intuitively understand this, and had been shifting to investing in real assets like gold and real estate, and away from financial assets like deposits. This meant that India needed to borrow from abroad to fund investment, which led to a growing unsustainable current account deficit,” Rajan had observed in June.

  1. D
    Dhiren
    Sep 22, 2016 at 3:31 am
    Unfortunate that the main sources of a country's savings, the households / small savers, are treated like this - under the crony capitalist umbrella of "growth". Reducing borrowing rates indiscriminately and sucbing to the pressures of the large borrowers can only mean doom for the country. Have we learnt nothing from the sudden magical collapses of large companies (those which cannot be named) ?Let us also formulate some policies that benefit the small savers. Atleast, small saving schemes can be inflation linked, so that some "real return" is attained.
    Reply
    1. B
      BoW
      Sep 19, 2016 at 6:13 am
      The FM's attempt to derive economy growth from rate cuts is as desperate as it is misguided. It is also based on the huge statistical lie of 'inflation rate'. Rural inflation rates have always been higher than 'statistically reported inflation rates'. A rtue and actual reflection of inflation rates should only be derived from a panel of, say, 1000 average rural and urban householders adn on the street reporting of commodity, rental, vegetable etc. prices. The mygov site can be easily used for this, but for this to happen the FM and puppet masters / coteries (if any) should not use the statistical inflation lie as a a tool.
      Reply
      1. S
        Sumer Jain
        Sep 19, 2016 at 4:52 am
        With bank depoits interest rates falling,intelligent investors have been shifting to other avanues namely Gold,silver,real estate,corporate deposits,Non-convertible debentures,mutual funds-Fifed income plans as well as Equity and balanced funds.With out seeking public mandate how can government pump in additional money/recapitalize banks to compensate them for losses they suffered due to large scale loans taken by large corportes and not returned.There is no effective way to get back unsecured loans.Banks get back only secured loans sanctioned against mortgage and guarantors to individual borrowers.The bank recapitalization from tax payers money by government will fuel inflation and printing of paper money.Citizens beware.
        Reply
        1. S
          Sumer Jain
          Sep 19, 2016 at 6:47 am
          With bank depoits interest rates falling,intelligent investors have been shifting to other avanues namely Gold,silver,real estate,corporate deposits,Non-convertible debentures,mutual funds-Fixed income plans as well as Equity and balanced funds.With out seeking public mandate how can government pump in additional money/recapitalize banks to compensate them for losses they suffered due to large scale loans taken by large corporates and not returned.There is no effective way to get back unsecured loans.Banks get back only secured loans sanctioned against mortgage and guarantors to individual borrowers.The bank recapitalization from tax payers money by government will fuel inflation and printing of paper money.Rising inflation and falling interest rates to pamper rich and corporate may bring many senior citizens on road and many below poverty line.The little money saved by senior citizens over their life time may not be enough for two meals shortly.Citizens beware.
          Reply
          1. S
            Sumer Jain
            Sep 19, 2016 at 7:03 am
            You do not publish comments on which you differ.If you do not publish public comments,why should readers read your paper and offer comments?You may please convey reasons for not publishing comments
            Reply
            1. N
              Narendra M
              Sep 19, 2016 at 3:41 am
              This is not very good news for that large group of people in our society, comprising mainly senior citizens (non-pensioners) and others, who essentially live on income from interests. Already the rates of interest on National Saving Schemes have been reduced with effect from 1st April, 2016. Interest rates on fixed deposits with banks have started falling during the past twelve months and are, as reported in this news report, around 7.00 per cent for one year deposits. Interest rate on Senior Citizens' Savings Scheme too has been reduced from 1st April, 2016. Indeed scenario is very bleak. I wish that Union Finance Minister, who has been saying that our interest rates are high, recognises plight of these citizens. One hopes that senior citizens whom are not pensioners are not driven to the wall by implementation of policies which adversely impact their monthly budgets.
              Reply
              1. S
                S.K.Gupta
                Sep 19, 2016 at 4:59 am
                The people should thank FM Arun Jaitley for coming to the rescue of these errant banks who are thriving because of his mindless policies. He had served a severe blow to the senior citizens by "pruning" the interest rates on various govt sponsored saving schemes.
                Reply
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