Interest Rates Witnessed a Sharp Drop in 2020

The year 2020 witnessed a drastic drop in the interest rates offered by banks on all kinds of deposits ranging from a savings account, term/fixed deposits, current account. The Reserve Bank of India had to maintain an accommodative stance for fiscal 2020 to ensure economic growth.

Currently, the interest rates on the savings bank account offered by the leading bank State Bank of India (SBI), stands below 3% per annum.

Interest Rates Witnessed a Sharp Drop in 2020

Between March and May, the RBI had reduced the benchmark repo rate to the tune of 115 basis points to support the ailing economy amidst the coronavirus induced slow-down. Hence the banks had to reduce both the deposit rates as well as lending rates to adjust to the new interest rate scenario.

The falling interest rates did hurt many individuals and families who mainly depended on the interest amount fetched from the deposits to meet their monthly expenses.

The rise in the inflation levels throughout the year owing to the pandemic crisis and travel restrictions had forced the central bank to trim down interest rates to the lowest level.

During the recently held monetary policy review meeting during December, the RBI has kept the key policy rates unchanged in line with the market expectations amidst rising inflation.

Chief Economist of Axis Bank, Saugata Bhattacharya says "Savers will now start asking how much to save and also where to put their money. The economic uncertainties at present would mean that returns would not be at the top of savers mind, but it could have an impact on domestic savings".

The interest rates on the savings scheme will be reviewed by the government every three months. The calculations used to arrive at the interest rates for the savings scheme was suggested by the Shyamala Gopinath Committee. The report from the Committee had suggested that the interest rates offered for the different schemes should vary between 25 - 100 bps range higher than the interest rates offered by the government bonds holding similar maturity.

The savings bank account of SBI will fetch 2.7% per annum with effect from May 31, 2020. Private Banks like Kotak Mahindra Bank is offering an interest rate of 3.50% per annum on a savings account (balance amount up to Rs 1 lakh). On the other hand, ICICI Bank savings account will give the interest of 3% per annum on savings account for the end of day balance below Rs 50,00,000.

The uncertain economic scenario has led to the trimming down of the interest rates by most of the banks in India during fiscal 2020. Right now, banks in India do have sufficient liquidity but the demand for money amongst the public remains weak. The scenario has pressurized the core interest income, as the weak demand for money has created a mismatch between the interest earned on the loans and the interest fetched on the savings deposit.

Gaurav Kapur, Chief Economist at IndusInd Bank, says that "Interest rates have been lowered because there is an expectation that demand will be much lower due to a contraction in growth. That would also mean lower inflation. Expectations of inflation are also lower for the next one year so we should expect real rates for savers to adjust accordingly".

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