Softening retail inflation eases pricing pressure, but it’s likely to haunt households as real interest rates are unlikely to turn positive even next fiscal. Retail inflation has been decelerating consistently to 4.06 per cent in January from 4.6 per cent in December, still the real return for savers is negative as deposit rates are at multi-year lows. For instance, SBI is offering 2.9 per cent on savings accounts and 5.2 per cent on fixed deposits of under Rs 2 crore. Even if the inflation print remains at the threshold 4 per cent in the next few months, unless deposit rates rise, real returns will be negative.
This could disincentivise savings and prompt savers to either spend more or opt for riskier products. When inflation shot up in Q4 FY20, real interest return on bank deposits, as measured by the Reserve Bank of India’s (RBI) weighted average domestic term deposit rate, turned negative last fiscal itself. It widened significantly starting June 2020 when inflation took a turn for the worse and remained above RBI’s upper tolerance threshold of 6 per cent for six straight months.
Data for the lockdown months of April and May were not published. Between June and October 2020, the negative real return widened from 23 bps to a staggering 195 bps. But with retail consumer prices falling near the central bank’s threshold rate of 4-6 per cent, it gives comfort to markets even though real returns are nowhere near the positive territory.
According to SBI Research, negative real interest rates have been the new normal as household savings continued to rise in India despite lower rates on deposits at a time of intensified cash conservation and falling consumption. Its empirical analysis showed that in the past two decades, a change of at least 2 per cent in real deposit rates was required to change the savings rate by 1 per cent. Small changes in deposit rates hardly make any difference and hence it’s always costly to keep real interest rates at high levels for a significant period, it noted.
Incremental small savings deposits too have significantly slowed down as a percentage of incremental deposits with banks in the current fiscal, with people parking more money in liquid bank deposits rather than locking them in financial savings, according to SBI. Last week, RBI lowered its inflation projections for the current quarter at 5.2 per cent saying it has returned within the tolerance band. For the first half of the next fiscal, it’s estimated at 5.4-5 per cent and for the third quarter of FY22 at 4.3 per cent.