Press "Enter" to skip to content

High inflation, low interest rates hit household savings

Millions of households are staring at negative returns from their savings with inflation peaking at more than 7% in September and any further cut in key policy rates is expected to aggravate the situation.

This has created an alarming situation for households that are already facing growing financial insecurity as a result of the widespread disruptions caused by the pandemic.

While household financial savings typically refer to currency, bank deposits, debt securities, mutual funds, pension funds, insurance and investments in small savings schemes, experts said it is heavily skewed in favour of bank deposits where returns have been on a steady decline following various steps taken by the Reserve Bank of India to push liquidity into the financial system.

Adding to the woes is soaring prices, which, measured by the Consumer Price Index (CPI) was at 7.34% in September, holding for the sixth straight month above RBI’s flexible target of 2-6%. Meanwhile, State Bank of India’s (SBI) one-two year fixed deposit (typically used as a benchmark) offers a return of 4.9%, pushing the real rate or the inflation-adjusted return to -2.27%.

The situation has been aggravated by the abundance of liquidity in the system, experts said, leading banks to cut deposit rates in tandem with lower lending rates.

SBI, India’s largest bank, lowered its term deposit rates in the one-two year bracket by 20 bps last month. Meanwhile, RBI has cut the policy repo rate by 115 bps so far this year but has opted for pauses in the last two policy meetings. Read from source….