Real returns only get worse for savers as deposit rates drop in May


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

“New deposits come in at least 100 basis points below the cost of outstanding deposits, but the spread has narrowed in recent months, indicating tighter terms. Unlike loan rates, banks have been very specific about reducing deposit rates and this is visible in their deviation from the repo rate, ”a note from the brokerage firm said.

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

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A basis point is one hundredth of a percent.

Indians were forced to save last year after a nationwide lockdown put the brakes on spending beyond the essentials. Admittedly, when the restrictions were lifted, the savings levy was also brutal. However, the second wave of covid-19 infections and the threat of a third have made people unwilling to increase their spending. A look at the central bank’s survey of consumer confidence shows discretionary spending has taken a hit and the recovery is far away. This means that household savings would continue to grow and, unless there was a sudden shift from deposits to other financial instruments, real returns would remain depressed. The share of bank deposits in household savings was over 50% in March. Admittedly, deposits gave way to other financial instruments during the second wave.

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

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

That said, lending rates have bottomed out, analysts said. While rates cannot go up unless the RBI specifically hints at loosening monetary policy, interest rates are unlikely to ease any further. Historically, deposit rates have been the last to respond to tighter monetary policy conditions. Ergo, it will be some time before real returns start to look positive for depositors in India.

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