Negative returns for savers may hold back RBI from the repo rate cut

Negative returns for savers may hold back RBI from the repo rate cut

WITH REAL interest rates (interest rate minus inflation rate)turning negative, and erosion in the returns of savers, a large section of bankers say the Monetary Policy Committee (MPC) of the RBI— scheduled to meet August 4-6 may adopt a status-quo on policy rates shortly

• Technically, bank deposits are fetching negative real returns of nearly one percent (-0.99 percent) as a one-year fixed deposit the rate has come down to 5.10 percent (State Bank of India rate) whereas inflation in June was 6.09 percent.“The positive real interest rate logic weighs against an immediate further rate cut based on the current inflation trajectory. There is a significant likelihood of MPC members voting for a pause during the forthcoming review
• The Reserve Bank of India (RBI) decision to frontload repo rate cuts (115 basis points since February) to 4 percent has partly led to negative returns for depositors.
• Nominal Interest Rate = Inflation + Real Interest Rate
• Depositors while depositing money in banks look for the real interest rate. They will generally deposit the money when they get a positive real return. Now, since January, RBI has reduced its Repo rate and because of that banks have reduced the deposit rate and lending rate. Now, the deposit rate (nominal interest rate) has come to such a level that real interest rates are turning negative. 
• For example, presently inflation in June was 6.09% and SBI Fixed Deposit rate has come down to 5.10%, So this gives, Real Interest Rate = 5.10 - 6.09 = - 0.99%. So, this basically means that depositors are losing money by putting money in banks. And that is one of the reasons that more and more people are shifting towards shares (which has driven the share market in this corona crisis) and Gold.
• And because of this, RBI may not reduce the repo rate in the upcoming MPC meeting as it will further turn the real interest rate negative and can erode the savings of the banks.
• RBI has front-loaded the repo rate cuts (it means that whatever reduction RBI planned in the repo rate, most of it has been done in the start of the year) and further reduction is quite difficult as the MPC members are not sure about the inflation trajectory/path in the future.

Source: Indian Express