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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.

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