Financial Daily from THE HINDU group of publications
Sunday, Nov 03, 2002

Investment World
Port Info

Group Sites

Investment World - Insight
Money & Banking - Credit Policy
Columns - Taking count

Credit Policy: Nothing to cheer savers

Suresh Krishnamurthy

THE Monetary and Credit Policy pronouncements from the RBI had nothing to cheer the savers in the country. However, it could have been much worse. Thankfully, it was not. The cut in the bank rate could have been higher than the announced cut of 25 basis points. Importantly, the RBI Governor has said it will remain unchanged till the end of the financial year. In addition, the savings bank rate was not cut. That could have led to another round of significant decline in interest rates.

However, fixed and term deposit rates look set to decline by much more than 25 basis points. Some banks, such as Bank of Baroda and Punjab National Bank, which cut rates before the Credit Policy, have already or appear to be ready to bring down rates further. Private sector banks, such as Lakshmi Vilas Bank, have also aggressively cut rates. Longer-term rates, beyond three years, seem set to decline below 8 per cent in almost all banks, with public sector banks offering around 6.75- 7 per cent.

Real rates fall

The decline in deposit rates is only to be expected. However, what was disappointing was the reliance placed in the monetary policy on the WPI and the CPI indices for gauging inflation. Several tomes have been written on how the WPI and the CPI are not reliable inflation indicators. Still, they are cited to indicate the declining trend in inflation and how the decline in interest rates is, therefore, justified. That the rate of inflation has declined sharply in the past couple of years is believable. However, present levels of inflation, as indicated by the WPI and the CPI may be suspect.

Even if the official CPI numbers are taken for granted, then it is above 4 per cent. Clearly, real rates of return (simply put - the difference between nominal rate and inflation rate) have fallen sharply. What impact this will have on the savings habit is hard to guess. Perhaps, the powers that be are themselves intent on increasing consumption to kickstart economic growth.

Unfortunately, for an individual investor, increasing consumption may prove unwise. This is because of the prospect of rising taxes. Increasing fiscal deficits are pointers of increased taxes in future.

Perhaps, increased savings in the form of allocation to stocks need to be considered. In fact, the dividend yields on bank stocks are more than the interest rates on term deposits. For example, the expected dividend yield on Bank of Baroda at 8.5 per cent is more than the rate of 6.75 per cent offered on its three-year term deposits. This was the case even a year ago. However, the difference between term deposit yields and dividend yields have now widened. This may be an indicator that bank stocks or, in general, most stocks are undervalued.

Will rates rise?

Deposit rates may rise only after lending rates have also fallen to relatively low levels. Lending rates have not fallen as much as deposit rates in the last couple of years. Banks say they have contracted high-cost fixed deposits in the past, which prevent them from lowering lending rates. So, it may take a while for lending rates to decline.

The consistent decline in lending rates may be partly helpful in improving the credit offtake in the country. Only improvement in credit offtake will create pressure on liquidity and lead to a climate in which increase in deposit rates can materialise.

Here too, if the RBI cuts the CRR aggressively or liberalises the fixing of savings bank rates, then the extent of a rise in deposit rates may be checked. Of course, the trend in government borrowings also matters. Any significant increase in government borrowings along with improvement in credit offtake may even ignite inflationary expectations. That will be far worse for the savers.

All things considered, the factors are ranged against any significant rise in interest rates or real rate of return. Essentially, the possibility of interest rates staying at present levels for a longer time indicates that the proportion of savings from income needs to be enhanced (and possibly invested in stocks) to achieve financial goals.

Send this article to Friends by E-Mail
Comment on this article to

Stories in this Section
The jewel in Toyota's crown

Paints: Shades of pink
Getting FMCG hues
`Premium exterior paints growing at 20-25%' — Mr H. M. Bharuka, Managing Director, Goodlass Nerolac
Foreign strokes
Knowing their colours
Insurance brokerage
Alliance Basic Industries: Hold
Morgan Stanley Growth: Hold
UTI break-up gets under way
Mastershare 1986: Hold
Distorting `options' in equity funds
KM K-Tech: Hold
UTI split cleared
Pru ICICI launches index fund
Dr Reddy's: A good bet
Tata Engineering: Buy
ABB: Hold
Exide Industries: Buy
HCL Technologies: Buy (High risk)
Sun Pharma: Hold
Market-linked insurance plans: Premium option
Of human behaviour and economics
NSS 1992 discontinued
Positive trend in Infy
Book profit in Tata Steel
Bull-run in Bajaj Auto
Nasdaq: Trading sentiment perks up
Under a bull spell
Bonds carry downward bias
Tech stocks remain in focus
Using futures/options: The probability game
Options guide
Futures guide
REC capital gains bonds: Powerful, but...
Ashok Leyland Finance: Creditable option
Bank deposit rates drop
Kothari Finance to repay deposits
`China is our No.1 priority' — Mr Gerhard Watzinger, CEO, Mascot Systems
Dividend income/PF/Set-off: Treated as `business income'
Set-off, carry forward, asset status
July-September quarter: A case of diverging lines
Pricing pressures prevail
Reliance gas and Indian energy
Credit Policy: Nothing to cheer savers
Needed, a reasoned approach from SEBI
It Adds Up!

The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | The Sportstar | Frontline | Home |

Copyright 2002, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line