Real returns turn negative


A sharp fall in deposit rates due to aggressive rate cuts by banks in response to the reduction in the benchmark rates by the RBI coupled with a rise in consumer prices have pulled real interest rates into negative territory, disincentivising savings.

The RBI has reduced its benchmark repo rate by 115 basis points between March and May to support the economy in light of the coronavirus induced slowdown. As a result, banks have had to cut lending and deposit rates to adjust to the new rate scenario.

Meanwhile, consumer prices have risen to 6.09% in June due to the supply side constraints induced by the lockdown enforced to check the spread of the pandemic. The real returns for savers have hence fallen. The one-year SBI deposit used to earn 6.5% as recently as September 2019 when inflation was at just 3.92%, thus giving a real return of as high as 250 basis points.

But savers who want to keep their money in SBI’s one-year term deposit now risk earning almost a percentage point lower than the current inflation rate. SBI’s one-year term deposit rate is now at 5.10%.

However, economists say real returns should be judged over a period of time and cannot be gauged from a month’s data.

Economists expect the CPI index to come down towards 4% by the end of 2020. However, there are also chances of more interest rate cuts by RBI which may force banks to reduce deposit rates further.


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