bank deposit rate: Interest rate hike benefits still elude term depositors

Borrowers are already feeling the pinch of the central bank’s 90-basis-point increase in policy rates in just over a month, but depositors have not much reason to cheer either – at least, not yet. For ordinary savers, therefore, the banking regulator’s dedicated bond-purchase platform presents an alternative investment opportunity.

Deposits maturing in two, three and five years are offering 89-151 basis points less than similar maturity government bonds. The differentials are the widest since 2014, show data compiled by ETIG, updated until June 8.

A basis points in 0.01 percentage point.

Savings across the country could contract, potentially boosting opportunities, therefore, for Retail Direct, a bespoke platform for individual savers to invest in sovereign papers directly.

“Lower deposit rates hit the bottom of the pyramid plus retirees, particularly when prices and lending rates are rising,” said Ashhish Vaidya, managing director at DBS Bank. “You cannot blame banks as well as any deposit rate hike will flow through only when the demand for money / credit off-take picks up.”

“We cannot have the gilt curve yields higher than the bank deposit rate curve for long,” he said.

Bank deposits with two-year, three-year and five-year are popular among individual savers. The average deposit rate of five-year bank deposits is 5.72 percent versus 7.23 percent yield in the five-year government bondtranslating into a differential of 151 basis points, the highest since April, 2014.

Governor Shaktikanta Das in November launched the ambitious retail direct plan aiming to bring in individuals to a hitherto opaque and difficult government bond market dominated by banks and institutional investors.

“Rate rises have not yet benefited depositors yet, with similar maturity government bonds yielding much higher,” said Madan Sabnavis, chief economist,

, “Demand for credit expansion has not gained momentum, stopping lenders from raising deposit rates. An investment via the Retail Direct plan suits well, provided the investor is fully conversant about the operations.”

The Monetary Policy Committee decided to raise the policy repo rate, at which banks borrow short-term funds from the central bank in two phrases – 40 basis points on May 4 and 50 basis points on Wednesday.

The average deposit rate of two-year bank deposits is at 5.59 percent versus 6.48 percent yield in the two-year government, making a differential of 89 basis points, the highest since April, 2018.

“The country’s overall long-term investment by households in the banking system may come down with people already facing the brunt of elevated inflation,” said Soumyajit Niyogi, director, Indian Ratings. “Ether the rates have to go up to compensate or some incentives might be given to bring back households via Retail Direct amid current circumstances.”

The spread is at 129 basis points for three-year maturity, the highest since April, 2014.

Once it is established, this will also help garner long-term funding for infrastructure needs.

“This is the time Retail Direct, with some tax incentives, should reach every nook and corner of the country to garner fixed income savings,” said Vaidya from DBS.

Proposals are reportedly under consideration to make the Retail Direct plan more popular with investor friendly measures.

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