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Bankers raise alarm over negative returns


(This story originally appeared in on Aug 28, 2020)

Mumbai: Banks have raised an alarm over real returns on deposit accounts turning negative with the rise in inflation numbers. The concern is that with deposit rates continued to be subdued, investors may not find bank deposits attractive enough.

“It is a tricky situation, interest rates cannot be the only factor driving the economy. If the savings rate goes below 3%, it is an alarming situation. As an emerging economy, we need higher contribution from savers,” said Punjab National Bank MD S S Mallikarjuna Rao, speaking at a banking event organised by Business Standard. Pointing out that inflation drives away the value of investments, he said banks have had to lower savings rates to adjust a mismatch in assets and liabilities but low rates are not sustainable.

According to data released by the government, consumer inflation — that is year-on-year growth in consumer price index — was close to 7% in July, with food inflation being higher at 9.6% due to supply disruptions during the pandemic.

Speaking at the same event, Union Bank of India MD & CEO Rajkiran Rai said, “We are a high-inflation country, so the real interest rates should count. Now the inflation rates are high and this should correct. Unless our inflation is around 2%, these kinds of rates will not attract depositors. Right now, there is a correction going on because I have to cut my rates as we are all sitting on surplus and lakhs of crores are lying with the RBI at 3.35% interest rates and it does not make sense to accept deposits and park them with the RBI,” he said

“Deposit and lending rates are inter-related and a part of a market mechanism. It now depends on how inflation moves,” said IDBI Bank chairman Rakesh Sharma.

Since February 2019, the RBI’s monetary policy committee has cut rates by 250 basis points (100bps = 1 percentage point). The sharpest reductions have come in the wake of the Covid-19 lockdown and were coupled with the release of over Rs 9 lakh crore of liquidity into the banking system. This triggered a reduction in both savings as well as fixed deposit rates.

In recent months, supply-side shocks have resulted in inflation remaining above the 6% mark. Given that interest on most deposits is now in the range of 6% and below, investors are getting negative returns on their savings.


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