Anxious time for depositors
The Fourth Bimonthly Monetary Policy for 2014-15 was unveiled by Governor Rajan on September 30, 2014. In a brilliant strategic move prior to the policy announcement, Governor Rajan set out in unequivocal terms that policy interest rates could not be reduced in the immediate ensuing period. While the objective of a CPI inflation rate of eight per cent by January 2015 appears reasonably secure, there are imponderables, both domestic and international, which could jeopardize the achievement of the inflation objective of six per cent for January 2016.
While there has been a surge of capital inflows into Emerging Market Economies (EMEs), there are concerns that if there is a sudden reversal of US monetary policy, resulting in a sharp increase in US interest rates, or geopolitical tensions intensify, there could be risks to growth. Moreover, demand in India is still tepid and there are serious risks in reducing Indian policy interest rates. Given this pre-policy guidance, there was only a mild symbolic protest by industry when policy interest rates were not reduced.
Inflation expectations survey
The RBI, like many other central banks, undertakes periodic inflation expectations surveys of individuals' perceptions of inflation in the ensuing period. While the RBI has undertaken considerable work to refine these surveys there are hazards in such surveys. The latest survey unequivocally indicates that the common person's perception is that inflation will continue to remain high or perhaps even somewhat higher than in the immediate previous period.
Low credit demand and deposit interest rates
The year-on-year non-food credit expansion as of September 2014, was 9.7 per cent-the lowest since 2001. With aggregate deposit growth, on a year-on-year basis, being a little less than 14 per cent, there are concerns that banks, to defend their margins, will start cutting term deposit interest rates. In fact, the State Bank of India has already reduced its medium-term deposit rate of over one year by 0.25 percentage point to 8.75 per cent, and other major banks could quickly follow suit.
Individual depositors are faced with the prospect of lower nominal deposit rates combined with relatively high year-on-year inflation rates, fractionally below eight per cent. As it is, savers are moving away from financial savings and this adverse trend could well be aggravated.
What should the common depositor do? Depositors would be well advised to quickly lock in whatever temporary surpluses they may have into one year and over term deposit maturities. Since penalties on premature withdrawal of term deposits are waived, depositors should move into the highest interest rate maturity of term deposits. Again, depositors should reduce their savings bank balances to the bare minimum. Elite depositors have sweeping accounts and multiple option maturities, but the common run of depositors are unaware of such products. Given the precarious position of depositors, it is best that small depositors endeavour to maximise their earnings on deposits.
Problem of Low Savings Bank Deposit Rates
It has been, time and again, articulated in this column that public sector banks and large private sector banks have cartelised the savings bank deposit rate. After the savings bank deposit interest rate was deregulated, these banks, as part of a tacit agreement, kept the savings bank rate at four per cent, i.e. the pre-deregulated controlled rate. A few small banks dared to break rank and raised their savings bank rate. It makes sense for a bank with a low current and savings bank ratio (CASA) to offer a higher savings bank rate. If such banks raise their savings bank rate by say a mere 0.50 percentage point, it would be counterproductive; but if they undertook, say a two percentage point quantum jump and made a conscious effort to reduce their longer-term high cost term deposits, their overall cost of funds would come down. Why does not one of the low CASA public sector banks consider this strategy? Is it the fear of retaliation or blackballing?
Depositors' associations and regulators
Apart from individual depositor action, there is need for collective action. Associations like the All India Bank Depositors' Association (AIBDA) should launch an awareness programme and open up a dialogue on cartelization with the RBI, the Indian Banks Association and the Competition Commission. It bears mentioning that the AIBDA was instrumental in persuading the RBI to deregulate the savings bank rate.
Again, legal steps should be taken to file a Special Leave Petition in the courts on the issue of cartelisation. A Right to Information application needs to be made calling upon banks to reveal the process by which they determine the savings bank deposit rate.
The institutional memory of the RBI would tell it that in the late 1980s, when the first step towards deregulation of lending rates was undertaken, all banks fixed their rate at the pre-deregulated rate. Banks in response to gentle persuasion by the RBI moved away from tacit cartelisation and each bank fixed its own rate. Again, when term deposit rates were deregulated, each bank fixed its own rate. The RBI would be well-advised to proactively look into the process of savings bank interest rate determination. The common depositor has been, for all practical purposes, disenfranchised, when, in fact depositors are the true owners of banks. The time has come for concerted action by depositors.
Please Note: This article was first published in The Freepress Journal on October 06, 2014. Syndicated.
This column, Common Voice is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Hindu Business Line, is titled Maverick View.
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