JOIN USUncertainty swells bank deposits, despite falling interest
Bank deposits have turned out to be the preferred option for risk-averse retail investors, despite a drastic fall in interest rates, as equity markets are reeling under heavy sell-off in recent months.
A DH analysis of various data points gathered from the RBI, banks and stock exchanges shows that banks have been reducing interest rates on deposits since October 2019, when the RBI made it mandatory for them to come with at least one loan product linked to external benchmarking.
Between October 2019 and February 2020, the weighted average interest rates by banks on deposits dipped by 39 basis points, compared with 1 bps reduction till September 2019 from February 2019, when the RBI started slashing repo rates.
As a result, the average interest rate on bank deposits stood `at 6.45% in February — the lowest in at least six years (since the RBI started providing the data). The numbers, since then, have further gone down till April — the RBI data for which will be available by June 2020 — as the central bank decided to cut repo rate by 75 bps on March 27.
Despite the dip in interest rates, banks saw deposits growing by Rs 2.32 lakh crore in the last fortnight of March — one-fourth of the incremental growth during FY20 — as equity markets tumbled.
Even after the RBI announced cut in repo rates on March 27 and the subsequent rate reduction by banks, there is no dip in deposits. The liquidity surplus in the banking system has doubled since then, reveals the data available with the RBI.
“In these uncertain times, the safer bet for retail investors is bank deposits. That is why you are seeing high liquidity in the financial system. Yes, there has been a bit of migration,” a CEO of a top fund house told DH. Even as equity markets have stabilised after a mayhem in March, BSE Sensex is giving a 52-week return of negative (-) 19.3%, and Nifty a negative (-) 21.2%.
However, many believe that investors are moving towards deposits only for a short term.
“Over the long term, equity investments in good companies will, on a tax-adjusted basis, outperform bank deposits. The recent increase in deposits actually reflects the risk-averse behaviour of Indian consumers. Bank deposits should be looked at to meet liquidity objectives and will not beat inflation. On the contrary, equity investments over the long term are designed to beat inflation,” said Jimeet Modi of Samco Securities.
Top five
Among individual banks, Ujjivan Small Finance Bank (up to 8%) provides the highest interest rate on fixed deposits in India, followed by RBL Bank (up to 7.25%), DCB Bank (up to 7.6%), AU Small Finance Bank (up to 7.53%), and IDFC First Bank (7.25% across tenors)