Money & Banking

Negative real rate unlikely to hurt household financial savings: Report

Our Bureau Mumbai | Updated on July 31, 2020 Published on July 31, 2020

The CPI (consumer price index) inflation adjusted deposit rate (that is real interest rate) has turned negative to –0.8 per cent in December 2019

‘People are parking more money in liquid bank deposits rather than in financial savings’

People are currently increasing their savings even in the face of negative real interest rate as they are saving money as a precautionary motive amid the Covid-19 pandemic, according to State Bank of India’s research report “Ecowrap”.

Real interest rate is the interest rate that has been adjusted for inflation.

The report underscored that the CPI (consumer price index) inflation-adjusted deposit rate (that is real interest rate) has turned negative to –0.8 per cent in December 2019, when inflation touched 7.4 per cent and deposits rate 6.6 per cent. Thereafter, it continued in the negative zone due to the uptick in inflation and downward interest rate scenario.

Real interest rate: Negative zone

“We expect that inflation will remain at elevated levels for the next few months so the real interest rate will continue to be in the negative zone.

“We believe in the current scenario, this will be appropriate for financial markets as negative real rate is unlikely hurt household financial savings given the uncertainty surrounding pandemic,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

Interestingly, SBI’s empirical results suggest a significantly weak linkage between household savings in bank deposits and real rate of interest.

Small savings accrual slowdown

The report observed that the incremental small savings deposits have significantly slowed down as a percentage of incremental All Scheduled Commercial Bank (ASCB) deposits in the current fiscal, with people parking more money in liquid bank deposits rather than in financial savings.

“This is intriguing as it shows financialisation of household savings happening in select instruments (perhaps in the stock market too!),” it added.

Referring to the causality analysis, whereby high GDP growth and increase in per capita income can only significantly improve the savings rates in India in the long term, Ghosh said the recent jump in household savings might not be sustained.

He reasoned that it now seems that growth disruptions will continue for at least in H1 (April-September) of the current fiscal, implying that both Q1 (April-June) and Q2 (July-September) growth numbers will be washouts.

No rate cut

“Despite all this, we believe an August rate cut is unlikely. With the 115 basis points (bps) reduction in repo beginning February, banks have already transmitted 72 bps to the customers on fresh loans in the interregnum, which is perhaps a milestone in terms of the fastest policy rate transmission in India,” Ghosh said.

Large banks have transmitted as much as 85 basis points. One basis point is equal to one hundredth of a percentage point.

“This has happened because of a proactive RBI using liquidity, among others, as a tool to serve its policy objective.

“We believe that the MPC could now well debate what further unconventional policy measures could be resorted to in the current circumstances to ensure financial stability is continued to be addressed,” Ghosh said.

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Published on July 31, 2020
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