FD And Loan Interest Rates To Remain Low In 2021

Analysts expect central banks across the globe to maintain their highly accommodative monetary policies in 2021, even as the global economy is expected to accelerate economic growth away from last year's coronavirus-induced slowdown.

In Bloomberg's quarterly review of monetary policy that covers 90% of the world economy, no major western central bank is expected to hike interest rates this year.

In fact, China, India, Russia and Mexico are among those predicted to cut their benchmarks even further.

The assumption is that central bankers will want to guarantee that recovery is safe before they even start to consider tightening policy as continued uncertainty over COVID-19, elevated unemployment and weak inflation remain major concerns. Even if inflation makes a comeback this year, central banks will likely try to look through it, says a Bloomberg report.

RBI in a sticky situation

While addressing monetary stands taken by all major economies of the world, Bloomberg noted that the Reserve Bank of India (RBI) faces a deluge of foreign inflows, sticky inflation and uneven growth prospects.

Governor Shaktikanta Das has assured investors that monetary policy will stay accommodative through much of 2021, but Bloomberg Economics' forecast shows rates falling to 3% by the end of 2021 from the current 4%.

RBI cut repo rates by 115 basis points (1 bps = 0.01%) in 2020 to support the worst economic downturn independent India has ever seen. It has, however, put a pause on these rate cuts in the last three monetary policy meetings as consumer price index (a measure of retail inflation) stayed above the central bank's 2%-6% target range.

While the central bank tries to keep in check the glut of liquidity that threatens a spike in inflation as demand for goods and services revive, interest rates are set to stay low.

"We expect inflation to recede below the Reserve Bank of India's 6% upper tolerance level in December to allow an extremely dovish monetary policy committee to resume easing in 2021. We expect the RBI to lower the repo rate by 25 bps to 3.75% at the February review and to 3% by August 2021. With liquidity a bigger inflationary threat, we expect RBI's accommodative stance to switch to slashing borrowing costs this year," said Bloomberg Economics' Abhishek Gupta.

Banks in India have passed on less than half of RBI's 2020 rate cut, says report

According to an Economic Times report, banks have passed on less than 50% of the total repo rate cut brought by RBI since March 2020.

RBI had announced back-to-back rate cuts totalling 1.15% since March, making borrowing cheaper and stimulate the economy amid the coronavirus pandemic and lockdowns.

However, banks have failed to pass on the benefits to customers, said the report, adding that on an average, lending rates for fresh and outstanding loans across banks fell 50 bps and 40 bps, respectively, from April to November 2020.

Economists told the daily newspaper that the structure of deposit rates in Indian banks - which depend heavily on retail deposits instead of market-based or wholesale options - has contributed to this.

An economist at Barclays India explained to ET that in the past it took about 12 to 18 months for full transmission of policy rates depending on the liquidity conditions, as banks' significant costs were not directly linked to benchmark policy rates.

The ET report further said that while public banks on average have cut lending rates on outstanding loans by 59 bps and fresh loans by 68 bps between April and November 2020, private banks have only cut an average of 48 bps and 36 bps, respectively.

This could mean that interest rates, especially on loans, are likely to see a further decline in the coming months of 2021.

Deposit interest rates at all-time low

A sharp dip in repo rate was first reflected in FD interest rates as banks took it upon them to make an equally aggressive cut in deposit rates. While customers are sitting on extra cash, thanks to low consumption levels and postponement of large purchases, banks' interest rates on deposits have fallen to all-time lows.

The State Bank of India, the country's largest bank, currently offers 2.70% per annum on savings account deposits and 2.90% to 5.40% on fixed deposits. Rates could fall further, if and when, RBI announces another rate cut to push growth.