Fixed deposit interest rates in India are going down on account of the demonetization drive which has led to surplus funds being available in the form of deposits with financial institutions. As a result, they have lowered their fixed deposit interest rates to balance out the lowered interest rates on loans. Financial institutions do not require to raise money from the public by encouraging fixed deposits at present. Hence, they have reduced rates and instead, are focusing on getting more loan accounts with lower rates.
Cheaper loan rates induce growth for businesses and infrastructure and deposit rates are reduced to make up the difference. In case inflation stays at the same level, fixed deposit interest rates will not rise anytime soon.
NEED FOR GROWTH
Indian economy has been struggling. India’s GDP growth rate slowed to 6.1% in the March quarter — the slowest in two years — because of demonetisation, and credit growth to companies slowed to a trickle as banks are weighed down by a pile of bad loans. The June quarter earnings data now also points to a slowdown in some sectors ahead of the introduction of the goods and services tax (GST) on July 1.
DIFFERENCE WITH REAL RATES
Banks have largely been reluctant to pass on the rate cut announced by the RBI in October 2016. India’s real rates — the interest rates that banks actually hand out loans at —have remained above RBI’s own assessment range of 1.25-1.75% since the last time the central bank lowered the interest rate. This shows that RBI has room to cut rates without hurting savers, who benefit from the interest on deposits.
THE TAYLOR RULE
Most economists surveyed are right in betting on a rate cut if the so-called Taylor Rule, a yardstick to gauge the appropriate interest rate in the economy, is to be believed. The gap between RBI’s policy rate and the rate path prescribed by the Taylor rule is the widest since March 2015, when the central bank formally adopted inflation targeting. The rule, developed by Stanford University monetary economist John B Taylor, estimates the desired level of interest rates based on the output and the inflation gap. It is a widely used benchmark; Indian policymakers, including RBI officials, have often referred to it in the past.
RECORD LOW INFLATION
Inflation has consistently fallen, registering a more than five-year low in June. With the latest reading at 1.54%, the retail inflation is below the MPC’s target range of 2-6% and the RBI’s forecast. The fall could give RBI governor Urjit Patel the “greater clarity” he called for in the last monetary policy review, when he made a case against lowering interest rates to avoid “premature policy action”.