At the start of 2018, banks started increasing deposit rates and then moved on to gradually raising lending rates as well, even before the Reserve Bank of India (RBI) raised its benchmark repo rate. This is the rate at which banks borrow short-term funds from RBI.
But just a month into 2018, doomsday predictions on bank deposits started making rounds on social media as an announcement of ₹11,400 crore worth fraudulent transactions in Punjab National Bank came up. This was when the total non-performing assets of the banking sector were already close to ₹10 trillion. However, your deposits remained safe, retaining the gilt edge of perception around fixed deposits.
Meanwhile, there were some new developments during the year that were good for you and others that were not so good. Typically, every change in the sector matters as it impacts your savings in some way. Here’s a look at major developments in the banking space that had a direct bearing on you.
Interest rate cycle
While banks had already started raising deposit and lending rates, RBI increased its benchmark repo rate only in June. The upward revision in RBI rates came after over four years. Before June this year, the last time the repo rate was revised upwards was in January 2014, from 7.75% to 8%. The June rate hike was followed by another 25 basis points (bps) hike in August, taking the repo rate to 6.5%.
While banks had already started raising deposit and lending rates, RBI increased its benchmark repo rate only in June. The upward revision in RBI rates came after over four years. Before June this year, the last time the repo rate was revised upwards was in January 2014, from 7.75% to 8%. The June rate hike was followed by another 25 basis points (bps) hike in August, taking the repo rate to 6.5%.
RBI has not increased rates since then. In a post-monetary policy press conference, then RBI governor Urjit Patel had said that rate cuts were off the table in the current rate cycle and that the central bank wouldn’t hike rates at every meeting. However, inflation has remained low and crude oil prices have declined since then. “At this moment, in an environment where inflation is benign and oil prices have also come down, it is fair to say that RBI has perhaps moved from a tightening to a neutral environment. But whether they will cut rates or not will depend on the behaviour of the US dollar as well as oil prices as we go forward, but it is fair to say that risk is on the downside,” said Rajiv Anand, executive director - retail banking, Axis Bank Ltd.
External loan benchmarks
It has been observed in the past that transmission of RBI rate changes by banks to consumers has been poor. So when interest rates go up, they don’t come down easily for loans. But deposit rates are sticky at lower levels, and when rates increase, deposits rates don’t increase proportionately.
It has been observed in the past that transmission of RBI rate changes by banks to consumers has been poor. So when interest rates go up, they don’t come down easily for loans. But deposit rates are sticky at lower levels, and when rates increase, deposits rates don’t increase proportionately.
Now that may change. RBI has said that all new retail and small business loans with floating rates, taken on or after 1 April 2019, will now have to be benchmarked against external benchmarks such as RBI’s policy repo rate, 91-day treasury bill yield, 182-day treasury bill yield or any other benchmark market interest rate produced by Financial Benchmarks India Pvt. Ltd (FBIL).
While external benchmarking of floating retail loans is expected to improve transmission of rates and transparency of pricing of big-ticket loans like home loans, it may also increase volatility in interest rates. Moreover, the directions are only for banks, and close to half of home loans are taken from NBFCs. RBI is yet to release the final guidelines.
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