Monetary policy continues to be borrower-centric
Bank depositors, badly hit by the continuous reduction in interest rates, were expecting some relief in the recent monetary policy announcement. But, disappointingly, the Monetary Policy Committee on December 8 retained the key lending rate, repo, at 4 per cent and maintained its stance as accommodative.
The MPC said the policy stance will remain “accommodative” until there is sustainable recovery in the economy. It is reported that five out of six MPC members voted to keep the stance accommodative, which means the MPC is willing to either lower rates or keep them unchanged.
At the receiving end
But bank depositors perceive such a stance as a policy measure to accommodate and help the borrowers at the cost of depositors, who are the providers of funds for banks. At least now, as the retail inflation rate was inching up, the depositors expected that the policy rate will see some upward revision. India’s retail inflation rate, which is measured by the Consumer Price Index (CPI), rose to 4.48 per cent in October 2021. The CPI-based inflation in September was at 4.35 per cent. Hence the depositors once again feel checkmated by the policymakers.
Recently, the RBI released data relating to weighted average rate of interest on loans and also term deposits. For September 2014, the weighted average rate for term deposit for all scheduled commercial banks was 8.70 per cent. This has come down to 5.07 for October 2021. Hence there is a reduction of 3.63 percentage points.
During the same period, the weighted average rate for outstanding loans fell from 11.90 per cent to 9.02 per cent — a reduction of 2.88 percentage points. The depositors wonder how long they have to undergo this sacrifice.
Interest rate is nothing but cost of money. Hence it must reflect the inflation on all other goods and services. But its is artificially kept at a lower level to help bank borrowers. Between 2014 and 2021, the inflation was around 43.28 per cent. This means that the value of ₹100 in 2014 is equivalent to ₹143.28 in 2021. In other words, whatever one could buy for ₹100 in 2014, one will now need ₹143.28 to buy the same.
In 2014, State Bank of India was paying a maximum interest of 8.75 per cent on term deposit. To reflect the inflation, the rate will be equivalent to 12.53 per cent now. However, now the depositor gets a maximum of only 5.40 per cent. To this extent, his purchasing power gets eroded.
During the last one year, the domestic savings rate has increased from 30.1 to 30.9 per cent. However, the savings through deposits, which was 6.3 per cent in 2016-17, has gone down to 4.2 per cent in 2019-20. This simply shows that people are moving away from depositing their savings with banks. This will affect financial intermediation in the country.
When the savers get negative real return (that is what they get now), they will be forced to go for risky investment and many of them may not understand the risk involved until they burn their fingers.
When domestic savings migrate from banks, banks will no not be able to get cheaper funds and this will increase their cost of operation and hence interest on loans also.
But the policymakers don’t seem to bother. They seem keen only to accommodate borrowers. Initially, the borrowers want cheaper finance, then they want their non-performing accounts restructured, and finally they seek one-time settlement, resulting in banks taking a haircut. The same story keeps unfolding year after year.
The writer is a retired banker