Deposit holders would seek some solace from this move as the average return on a 1 year deposit is 5.8% which is still negative in real terms when juxtaposed with inflation that is running at 7% and will remain in the 6.5-7% range for the year. The issue is that when the repo rate goes up, the deposit rates do not move up by the same quantum. This is so because banks change interest rates depending on their requirements and may not typically like to lock in deposits for a long period of time.
Over the last one year, this average rate has gone up by 50 bps while the repo was up by 140 bps. Therefore the response of deposit rates is slow. Yet higher rates will be beneficial given that RBI data on savings show that people have moved from deposits to stocks and mutual funds ostensibly due to expectations of higher returns. Increase in deposit rates can reverse this movement.
The government has also increased returns on some of the small savings schemes by between 10-30 bps yesterday keeping in tune with the rising bond yields in the market. However, this has been done selectively with PPF and NSC remaining unchanged which are typically for a longer duration compared with post office savings. This can be another nudge to banks to relook at their deposit rates as there is a clear gap between increase in deposits and credit this year in the banking system as the former has trailed.
There is a negative gap of around Rs 70,000 crore in the system today which needs to be reversed as liquidity has tightened in the market.
This story is from the October 01, 2022 edition of The Free Press Journal.
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This story is from the October 01, 2022 edition of The Free Press Journal.
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