State Bank of India<\/a> (SBI) said in the latest edition of its report \u2018Ecowrap\u2019 on Friday.<\/p>\nIt is important to keep real rates negative at present as it could have a \u201csobering\u201d effect on asset quality, the report said, adding that there is unlikely to be a further cut in the repo rate in the August monetary policy review.<\/p>\n
Deposits rates are currently at multi-year lows, with SBI, the country\u2019s largest bank, offering 2.7% on savings accounts and 5.1% on fixed deposits of under Rs 2 crore.<\/p>\n
\u201c\u2026 it is largely believed that positive real interest rates act as an enabler of household savings if the substitution effect, in which saving increases as consumption is postponed to the future, dominates the wealth effect in which savers increase current consumption at the expense of saving. Paradoxically, in the current context, people are increasing their savings even as we are facing negative real interest rate as people are saving money as a precautionary motive,\u201d the SBI report said.<\/p>\n
It added that the incremental small savings deposits have significantly slowed down as a percentage of incremental deposits with scheduled commercial banks (SCBs) in the current fiscal, with people parking more money in liquid bank deposits rather than locking them in financial savings.<\/p>\n
SBI\u2019s empirical results show that for the period FY00 to FY20, a change of at least 2% in real deposit rates was required to change the savings rate by 1%. \u201cIn fact, small changes in deposit rates hardly make any difference and hence it is always costly to keep real interest rates at high levels for a significant period,\u201d the report said, adding, \u201cthis has happened in the past also when rate cuts lagged inflation trajectory and it is thus essential that we keep real interest rates at negative right now, as such will also have a sobering impact on asset quality.\u201d<\/p>\n
The bank believes that in the current scenario, this will be appropriate for financial markets as negative real rates are unlikely to hurt household financial savings, given the uncertainty surrounding the Covid pandemic.<\/p>\n
SBI does not expect a rate cut in the August policy. With the 115-basis point (bps) reduction in the repo beginning February, banks have already transmitted 72 bps to borrowers on fresh loans ever since. \u201cLarge banks have transmitted as much as 85 basis points. This has happened because of a proactive RBI<\/a> using liquidity among others as a tool to serve its policy objective. We believe that the MPC (monetary policy committee) could now well debate what further unconventional policy measures could be resorted to in the current circumstances to ensure financial stability is continued to be addressed,\u201d the report said.<\/p>\n
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