The Reserve Bank of India's (RBI) surprise move to cut repo rate by 40 basis points to 4 per cent has set the ground for further reduction in deposits rates. Two months ago, the RBI had cut the repo rate, the rate at which banks borrow funds from the central bank, by 75 basis points. This was done specifically to fight economic impact of coronavirus as the lockdown resulted in loss of production, revenue and growth.
But the interest rates have been on a decline for a long time now. Overall, interest rates have seen a gradual decline in the last six years. The benchmark interest rates have come down by 225 basis points in the last one year. The benchmark rates are almost half of the 8 per cent repo rate six years ago.
Banks flush with funds have little option to deploy it in market because of the lockdown. Retail, which was the fastest growing segment, has also been severely impacted. Banks are now mostly active in the bond market where they are lending money at around 7 per cent to high-rated corporate players. "The banks are lending money at a much lesser rate than their MCLR," says a bond dealer.
While the repo rate cut is directed at supporting growth, the fallout of the move will be on savers, especially senior citizens. The depositors stare at rock bottom interest rates going forward as the RBI's policy will remain accommodative till the economy comes out of coronavirus-led slowdown. This is actually going to hurt senior citizens the most as most of them are loan free with money in banks for their monthly income support.
In fact, the ICICI Bank recently came out with a special deposit scheme for senior citizens offering 6.55 per cent per annum. The SBI too has a scheme for senior citizens, but these special deposit schemes are for a minimum 5 year period. SBI has reduced savings rate to its lowest level of 2.75 per cent per annum. Similarly, the SBI's term deposit rates for a year gives 5.70 per cent.
SBI Chairman Rajnish Kumar said that the interest rates are going down in the economy for both borrowers as well as depositors. "We will be convening our ALCO (asset liability committee ) meeting where we will take the stock of the current (RBI) announcements and their impact," said Kumar in a media briefing.