Monetary Policy: Will Saving Accounts Interest Rates Rise Even When RBI Holds Rates?

The obvious effect of RBI's decision on repo rates on Friday will be felt in both deposits and lending rates at banks. Although having a parallel shift with the repo rate cut, or status quo or hike, the impact of deposit rates and lending rates are different and passed onto end consumers. In the current financial year so far, RBI has held the repo rate at 6.5% for four consecutive policies, and the fifth one will not be any different. But this has also led to a dry movement in savings account interest rates as well. Could RBI's December policy bring any changes in terms of savings?

According to Emkay Global, a benign global narrative, tighter system liquidity and easing core inflation despite stronger growth, will be the backdrop of the upcoming MPC meeting. The swift change in global risk appetite and low volatility provide comfort to the RBI in lowering the risk of financial instability. This also, thus, reduces the need to conduct OMO sales as a way to depict implied bias for higher rates and higher risk premia to the world. The policy focus then reverts to the domestic narrative, wherein the resurgence of food inflation and slow policy transmission will be key.

Emkay's note said, "We expect the RBI to softly prod banks to nudge up SA rates while ruling out any explicit policy directive to re-regulate such rates."

In the case of savings account rates, Emkay's note highlighted that the RBI's consistent discomfort, with runaway growth in unsecured loans, ultimately resulted in tighter regulatory norms in October 2023. In the same vein, the RBI has voiced its dissent about lower (

Moreover, the brokerage pointed out that RBI also flagged the reduced spread of new loan rates over the repo rate, all of which is moderating the extent of the transmission.

Following this, Emkay's note said, "While we believe the RBI should/would not intervene in banks' commercial decisions, we do not rule out the regulator softly prodding banks, instead of re-regulating the SA rate via any official directive. Higher SA rates could hurt growth/earnings of banks with higher SA deposit share unless mitigated by the increasing floating lending rates."

Further, Emkay mentioned that its BFSI team estimates that a 25bps increase in SA rate across banks could lead to
adverse impact of 5-9bps on NIM, 2-3% on EPS, 3-4bps on RoA, and 26-45bps on RoE for large PVBs.

RBI has kept rates unchanged since the start of FY24 to observe the rate hike impacts on the economy and businesses. After Russia invaded Ukraine in early 2022, RBI including other central banks went for aggressive hiking in interest rates to tame extreme inflation pressure. From May 2022 to February 2023, RBI has hiked the repo rate by 250 bps.

MPC has also decided to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth. These decisions align to achieve the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2 per cent while supporting growth.

Since the last MPC during October 2023, Emkay stated that financial markets have been broadly pushing up asset prices and reversed around half of the bond-yield spike of the last quarter. This is backed by the higher market conviction of a wider runway for a soft landing and the Fed's terminal state (a US Goldilocks scenario), with recent policy communication suggesting that the risk of further tightening has significantly receded.

Underlying this rise in risk appetite, it said, the rates market now incorporates relatively high probabilities of easing by both, the Fed and ECB, next quarter, led by better-than-expected recent inflation reports.

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