Reduction in term deposit interest rates – Recent trends
Indian economy has been facing a slow down during major part of the calendar year 2019. The global slowdown arising out of China-US trade war, reduction in oil price, global economic slowdown etc have had its impact on Indian economy too. Internal events like demonetisation and GST implementation also added to the economy slowdown in the country. Reserve Bank of India, the regulator has been trying its level best to boost the economy through various monetary policy measures including Repo rate reductions. Interest rate on both fixed deposits and advances have come down drastically during the last fifteen months as a consequence to the monetary policy measures adopted by RBI to boost economy.
Monitory policy measures and its impact on deposit interest rates
RBI in the recent past has brought in radical changes in the interest rate decisions adopted by banks, through its monitory policies. In order to ensure that the reduction in repo rates announced by RBI is percolated to market, banks were directed to link the interest rate for retail loans and MSME sector to one of the announced external benchmark rates. Many banks preferred Repo rate as their external benchmarks. This process was initiated by RBI to ensure that banks extend credit facilities at the lowest possible rate and thereby improve investments and employment opportunities.
As the income from advances reduced, in order to protect profit margins, banks were forced to reduce the interest rates offered on deposits including savings bank accounts. Majority of the banks have linked interest rate payable on SB accounts also to external benchmark rate (Repo rate). Repo rate that was at 6.25% on February 7, 2019 came down to 4.40% by March 27,2020. These reductions had real impact on the interest rates for deposits and advances and both have reduced more or less in line with the cut in repo rate. In short, both deposit and advance interest rates have come down substantially during the last 15 months.
Covid 19 – Real villain for depositors causing reduction in deposit interest rates
The reduction in interest rates has been more visible since the outbreak of Covid 19. Central banks have been reducing policy rates as a measure to combat the economic slowdown caused by the pandemic. RBI was forced to slash the rate to 4.40% effective from March 27,2020 in its effort to counter the economic impact caused by Covid-19. (The prevailing rate was 5.15% since October 2019)
The interest rate of advances linked to the external benchmark of Repo rate came down by 75 bps. For those banks which have linked the interest rate on SB accounts to Repo rate also came down. Banks announced downward reduction in fixed / term deposits in tune with the reduction in policy rate and also their deposit position.
How does reduction in interest rate on deposits affect senior citizens?
Fixed deposits, equity mutual funds, debt mutual funds, Sovereign Gold Bonds (SGB), ULIP, Small Savings deposits, direct investments in equity gold, real estate etc are the major investment options available in India. Continuation of investment for a reasonable period is essential for a reasonable return in majority of these investments like equity mutual funds, gold, real estate etc.
For a senior citizen, assurance of reasonable return over a period and easy liquidity are two guiding principles of investment. Term deposits of banks exhibit both these characteristics and senior citizens have been channelizing major part of their surplus funds to bank deposits. Remaining portions were being channelized to debt mutual funds and small savings deposit schemes. Debt mutual funds too are facing challenges consequent to the closure of six debt funds by Franklin Templeton. Majority of the retired senior citizens are not eligible for pension benefits and many have been depending on the interest income on fixed deposits for their survival. Therefore, they have been at the receiving end of the reduction in interest rates.
