Financial Scene: Has RBI reversed it's stand on inflation-growth dynamics? - The Hindu

Financial Scene: Has RBI reversed it's stand on inflation-growth dynamics? - The Hindu

My VIEW:

Savers' interest

This refers to C R L Narasimhan’s article “Nowhere
to go” (Financial Scene, October 5). Banks have started passing on the impact
of the rate cut by reducing deposit rates, though the hurry is not that evident
in reducing lending rates at the ground level, as banks know how to maintain
the level of interest income despite changes in prime lending rates. Going by
the finance ministry announcement about the ‘review’ of rates on PPF and Small
Savings, which according to the ministry, stands in the way of banks in reducing
interest rates, the reduction in interest rates on PPF and Small Savings is
imminent.

Those who are responsible to pay interest
have every right to review the rates and bring it down to their advantage. But,
those who have invested their savings with a long term perspective considering
the security and liquidity concerns, should not be given a shock, just because
there is a temporary change in the movement of wholesale prices.

Some analysts console savers that return
on investments have become ‘positive’ these days with inflation getting tamed.
May be true. But one is yet to come across a single household budget, which has
come down because prices have come down in the recent past.

At present, interest paid by bigger banks
on long term FDs is less than 8 per cent per annum, post office term deposits
earn between 8.40(3 year Term Deposits)
and 8.80 per cent (10 year National Savings Certificates) and Public
Provident Fund Scheme fetches 8.70 per cent per annum. A revision of these
rates downward will move savers from safe and secure investments to other
riskier avenues which again will involve a social cost to the nation in the
long run.

It is also worth pondering over whether
government’s own market borrowings and resources mobilisation will be
sustainable, if the rates are linked to RBI’s repo rates or deposit rates of
banks and if SLR of banks and funds with EPFO, LIC etc  no longer remain a captive source.

M G Warrier, Mumbai

October 7, 2015

On Narasimhan’s article reader Subbu posted the following comment:

“When a rate cut was anticipated based on containment of inflation, it implied a rate cut for deposits also; otherwise, the banks would have to face the prospect of lending at lower rates and keeping the deposit rates constant - a possibility which would be ruinous to banks. If the concerns of depositors are to be addressed, measures will have to be initiated through fiscal policies and not by fleecing banks which are business enterprises, not charitable institutions.”

My response, as published, is copied below:

“All should agree with this view. Banks should be allowed to function as 'business enterprises'. Banks have something like trusteeship right only on the resources they mobilise and they are expected to manage their assets and liabilities keeping the interest of their owners (depositors) in view. Banks are able to provide credit, because the savers keep their savings with them. It is not the funds provided by RBI at the 'rate' which remains in the limelight all through, that forms the major source of funds for providing credit. Even if fiscal policy support is necessary for protecting depositors' interest, it is for the banks to take up that too with government.”

M G Warrier