As inflation breached the psychological level of 8% and settled at 8.1%, real interest rates on long-term bank deposits have turned negative after a gap of nearly three-and-half years. Last time, this phenomenon happened in December 2004, when the point-to-point wholesale price index was at 6.7% and term-deposit rates remained in the range of 5.25-6.25%, according to Reserve Bank of India (RBI) statistics.
The present negative returns on public savings in select maturities have fuelled an all-round expectation of a rise in deposit rates, especially with State Bank of India (SBI) biting the bullet. ET spoke to a cross-section of bankers and financial market players on the issue of real interest rates.
A majority agreed to the economic logic of rising deposit rates to cover inflation. But it appears that banks are unlikely to follow the country’s banking leader in this aspect, as there is no dearth of systemic liquidity in the absence of significant credit demand.
Interestingly too, as an economist with a leading bank explained, interest sensitivity remained pretty low in the country and banks were unlikely to witness an ebb in deposit collection even with real interest turning negative.
Be that as it may, real interest rates have turned negative for select long-term deposit products offered by Axis Bank, Bank of Baroda (BoB), HDFC Bank, ICICI Bank and United Bank of India (UBI). For instance, the returns are negative for over three-year maturities at Axis Bank, for over five-year maturities at BoB and for 1-3-year maturities at UBI.
Last time round, deposit rates on inflation-adjusted terms remained negative for the entire second half of 2004.
During that time, the key inflation index sea-sawed between 6.7% and 8.5% and deposit rates were kept below the inflation rate without having any significant impact on mobilisation. Now, the price index has again touched 8.1% for the week ended May 17, the highest in 45 months. It rose from 7.82% in the preceding week.
Union Bank of Indian chairman and managing director MV Nair said: “It is advisable to watch the inflation scenario for the next couple of months to take a decision on deposit rates.”
Allahabad Bank chairman and managing director AC Mahajan said: “The bank’s asset and liability committee met on May 27 and has decided to keep the rates unchanged at the current level.”
Real interest rates on short-term deposits (less than one year) have been negative for quite some time now. However, short-term interest rates reflect merely demand and supply factors.
“People keep funds at short-term instruments for liquidity and transaction and interest on such instruments is merely incidental and not meant to cover inflation. Long-term rates should reflect that,” a senior executive at Bank of India explained.
SBI, on the other hand, had to increase its deposit rates to attract resources to meet the short-term credit demand from oil marketing companies, in the light of rising crude oil prices. National Commodity & Derivatives Exchange chief economist Madan Sabnavis said: “As such, there is no significant credit demand and there is ample liquidity in the system. So, banks are unlikely to raise deposit rates hereon.”
Investment banking company Centrum Capital managing director TR Madhavan said: “Banks should have a need for short-term funds before they raise deposit rates. Seemingly, they don’t require it at this juncture, given the current liquidity in the system.”
A rise in deposit rate typically means more pressure on lending rates to cover the cost. But the signal from the Reserve Bank of India is indicating a softening of lending rates. So, banks are busy in protecting the interest rate margin.
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