At a time when trade and industry are clamouring for a cut in key policy rates by the Reserve Bank of India, a lone voice begs to differ.
The All-India Bank Depositors Association (AIBDA) wants the RBI to take a call on the direction of interest rates only if there is a sustained fall in inflation. A decline over just a couple of months should not sway the central bank’s decision.
“Various non-monetary factors are holding back recovery of India’s growth and also adversely affecting investment outlook. Therefore, the RBI should not succumb to pressures (from trade and industry) to cut key policy rates. It should take a more objective and calibrated view,” said Sunil S. Bhandare, President, AIBDA.
AIBDA, in a pre-policy consultation with the RBI earlier this month, suggested that while determining the scope and direction of monetary policy, the RBI must give adequate consideration towards ensuring a stable, fair and reasonable rate of return on bank deposits.
Inflation-proofing
The Association pointed out that small depositors and senior citizens have borne the brunt of stubbornly high inflation over the last three years, causing erosion of real earnings (inflation-adjusted returns)
The AIBDA has represented that the interest rate for small depositors and senior citizens should be at a mark-up of 3 percentage points over the annual average consumer price index (CPI) based inflation, said
The Association defines small depositors as those with deposits up to Rs 5 lakh, and senior citizen depositors, who generally prefer to park their terminal benefits in bank deposits, as those with deposits up to Rs 15 lakh.
This is the first time the central bank has invited a depositors body for the pre-policy consultation exercise. The RBI will unveil its annual policy on May 3.
Bhandare, also an Advisor (Economic and Government Policy) with the Tata Strategic Management Group, observed that the RBI is competent to formulate specific details of the ‘inflation-proof’ deposit scheme.
Asked about the government’s plan to introduce inflation-indexed bonds (to protect savers from the adverse effects of inflation), Ashok Ravat, Honorary Secretary, AIBDA, said the common man will not be able to grasp the nitty-gritty of bond yields and prices. Hence, inflation-proof deposits are the best bet.
NPAs, deposit rates
The AIBDA emphasised that rising bad loans (or non-performing assets) not only undermine the confidence of bank depositors but also potentially harm their potential rate of return on deposits.
“With bad loans squeezing profit margins (due to provisioning), banks appear to be virtually under compulsion to offer lower interest rates to bank depositors. Build of bad loans cannot be at the cost of depositors’ interest,” said Ravat.
According to the Association’s office-bearer, the RBI has to play a significant role in exerting some degree of discipline or ‘moral suasion’ so that bank depositors are adequately taken care of.