India: How Rates and Ratios are Moving
(For data from Jun2024 onwards, please check blog on Indian Economy Data Bank)
(Updates with new information as on 31Mar2024, 31Dec2023, 30Sep2023, 30Jun2023, 31Mar2023, 31Dec2022, 30Sep2022 and 30Jun2022 are available at the end of this blog post)
We can glean some insights from data. But datasets are often a bundle of contradictions. One data point nobody talks about now is 364-day Treasury Bill (364-DTB) yield. In the past six or seven weeks, the yield spiked by a massive 130 basis points from 4.62 per cent at end-Mar2022 to 5.92 per cent now. These are primary yields in auctions announced by Reserve Bank of India (RBI) from time to time, India's central bank, which also acts as a debt manager for the federal as well as state governments.
So, what has changed in the past seven weeks that stimulated such a big surge in Treasury Bill yields? In a surprise move and at an unscheduled meeting in the first week of May2022, RBI increased the policy repo rate by 40 basis points (or 0.40 percentage points) to 4.40 per cent. Even before the repo rate hike, RBI had given indications about the gradual withdrawal of massive liquidity it provided in the past two years since the outbreak of COVID-19 Pandemic.
As inflationary expectations have been rising, some banks have started raising their deposit rates slowly and lending rates by a wider margin. Financial markets too have taken note of the rising inflation (both consumer price inflation or CPI as well as wholesale price inflation or WPI). Accordingly, market-determined rates, like, T-bill rates, G-Sec rates and call money rates have started their upward journey in the past three or four months.
For example, call money rate (where banks borrow and lend money overnight without any collateral) rose from 3.32 per cent at end-Dec2021 to 4.06 per cent now.
High Inflation
CPI inflation has been, more or less, above RBI's comfort level of six per cent for the past 30 months or so. WPI inflation has been running in double digits for the past one year. CPI is now at 7.8 per cent, whereas WPI is at 15.1 per cent (both prints for Apr2022).
The data are presented in the table given below. RBI's policy repo rate had remained stagnant at 4 per cent between April 2020 and April 2022, despite higher inflationary expectations in the economy.
The table also gives data pertaining to various market rates, like, liquid mutual fund returns, one-year deposit rates, savings bank rates, post office deposit and other small savings rates and others. You can observe from the data: most of the deposit rates and other rates are supposed to be market-driven--in the sense that they are expected to respond to rising inflation and other market forces on a real time basis.
But all these rates have more less remained stagnant between April 2020 and January 2022. Take the case of small savings interest rates, which are administered by the Government of India. They are supposed to be market-driven (Tweet thread 16Feb2016) as per changes made in 2016 by Government of India. But these rates have remained unchanged for the past nine quarters (Apr2020 to Jun2022). These administered rates are linked to government security yields of similar maturity, but now the policy is abandoned by the government without giving any explanation for the flip-flop.
Low Market Returns
Take another example, liquid mutual fund returns. Liquid mutual funds invest in short-term instruments with a maturity of up to 91 days. But the one-year trailing returns collapsed below 4 per cent in Dec2020 and they now generate a one-year return of just 3.3 per cent; even though repo rate is at 4.4o per cent, T-Bill yields are 4 per cent and call money rate is above 4 per cent. To be fair, it will take another two or three quarters for the liquid fund returns to adjust to rising short-term interest rates in the banking system.
Even the benchmark market interest rate, 10-year G-Sec yield, remained stagnant between Mar2020 and Mar2022. Only in the past two months or so, it started rising and now it is above 7.30 per cent.
Negative real interest rates
Indian savers have continuously suffered negative real interest rates in the past two to three years. Even now, with rampaging inflation, negative real interest rates continue to dog senior citizens and others who depend on bank fixed deposits for their regular expenses.
Real interest rate is repo rate minus CPI inflation rate. Negative real interest rate means CPI inflation is well above the policy repo rate, and the purchasing power of money has been weakening year after year.
There seems to be no respite from negative real interest rates for the vulnerable sections of society.
From the table, you could observe how savings bank interest rates, term deposit rates and small savings interest rates (post office, PPF and NSC) have not responded to rising inflation and rising market rates.
Table: How Rates and Ratios are Moving:
(please click on the image for a better view)
To Sum Up
When monetary policy transmission is weak and when RBI plays ultra loose monetary policy too long, savers suffer enormously as shown above. Despite higher inflation, term deposit rates and small savings rates have failed to respond proportionately. India is supposed to be an economic giant and unfortunately, market economy seems to be not working properly.
In free markets, both lending and deposit rates should respond to the market forces (of supply and demand for money) in a proper way. But this has not been happening in India unfortunately. It is time the fiscal and monetary authorities took care of all the stakeholders, including savers and depositors, and provided relief to the vulnerable.
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P.S.:
Update dated 22Apr2024 with new quarterly information as on 31Mar2024 >
The changes in data in the past one year (between 31Mar2023 and 31Mar2024) are very interesting:
1. While RBI policy rates remain the same in the past one year, lending rates are up by 50 basis points; while deposits are up less than 50 basis points.
2. RBI policy rates remain the same, even as CPI and WPI inflation are down by 81 basis points and 81 bp respectively.
3. While call money rates are slightly up, 91-day Treasury bill yield is up in the past one year; but yields of 182-day and 364-day T bills are up.
4. While RBI rates remain the same, CPI inflation and 10-year G-Sec yield are down in the past one year.
5. Post office deposit rates and other small savings rates, like, NSC and PPF do not move in line with the market interest rates; because Govt of India uses the instruments for political purposes.
6. However, there has been no change in PPF rate for the past 17 quarters, throwing PPF investors under the bus. It's not clear why PPF investors face the wrath of Govt of India for more than four years.
7. Due to tightness in banking liquidity, liquid mutual funds have responded well to the market dynamics. The one-year liquid fund returns rose from 5.50 percent as on 31Mar2023 to 7.08 percent as on 31Mar2024. This indicates liquid mutual funds are market-determined rates and respond well to interest rate market dynamics.
Update dated 13Jan2024 with new quarterly information as on 31Dec2023 >
Several interest rates in the Indian economy are not market-determined. For example, check savings bank deposit rates, which have remained the same in the past three and a half years. Nobody knows how the SB rates remain the same even though there is competition in the banking system; RBI also does not bother about the stickiness of SB rates. Obviously, RBI works as a protector of banks, as opposed to its mandated role of a supervisor.
Consider one-year term deposit rates of banks -- they are more or less the same in the past one year (see table 2 for yearly comparison); while liquid mutual fund returns are fetching 6.85 percent per year now versus 4.70 a year ago.
Without doubt, PM Modi government and banking regulator RBI have been unfair to savers and senior citizens in the past four years -- that is, especially, since the COVID-19 Pandemic outbreak.
Two tables are included -- one with quarterly movement and another with calendar year data from 2018 to 2023 >
Update dated 24Oct2023 with new quarterly information as on 30Sep2023 >
Calendar quarter CPI inflation rates appear lower, however in between CPI surged up to 7.44 percent in Jul2023 and 6.83 percent in Aug2023 before cooling off to 5.02 percent, at least officially. However, the common people continue to suffer from heavily price rise in the past four years. Not much has been done by governments to alleviate the suffering of the people, except some empty sloganeering.
Meanwhile, PM Modi gov't continues to keep PPF investors under the bus by holding the PPF interest rate stagnant for more than 42 months since Apr2020. There is no reason to keep the rate at the same level while cumulative inflation has been surged massively in the past five years.
Moreover, PPF interest rate are expected to move, as per PM Modi govt's state policy itself, in tandem and are pegged at more than 100 basis points of 10-year government security yield. But the government has been violating its own stated policy for more than three years to the detriment of small savings investors.
P.S.:
Update dated 27Jul2023 with new quarterly information as on 30Jun2023 >
Inflationary pressures are down, while WPI inflation is in negative territory. Savings deposit interest rates have remained unchanged for more than three years. Other rates remained more or less the same in the past one quarter.
P.S.:
Update dated 17Apr2023 with new quarterly information as on 31Mar2023 >
But banks have not raised their savings bank deposit rates since Apr2020, when they were reduced substantially. Banks in India act like an oligopoly, with the banking regulator RBI looking the other way.
Government of India has not raised public provident fund (PPF) interest rate since Apr2020 and it has remained stagnant at 7.10 percent. It's not clear why PPF has not been raised even though 10-year G-Sec yield (to which PPF interest rate is benchmarked) has been above 7 percent for the past one year.
CPI inflation was more than 6 percent in January and February 2023, but it fell below 6 percent in Mar2023.
Update dated 30Jan2023 with yearly info from Dec2018 till Dec2022 >
Update dated 30Jan2023 with new quarterly information as on 31Dec2022 >
In the third quarter, bank fixed deposit rates have gone up faster than bank lending rates mainly due to dip in deposit growth rates as compared to bank loan growth -- to put differently, banks are unable to fund the resurgence in credit growth due to withdrawal of liquidity in the banking system by the Reserve Bank of India.
Real interest rates in India have turned positive as of 31Dec2022, for the first time in more than three years, as deposit rates have surged in recent months. Liquid fund returns too are going up due to increase in short-term market interest rates.
Update dated 14Oct2022 with new information as on 30Sep2022 >
As can be seen from the table given below, there are big movements in short term interest rates between Jun2022 and Sep2022. The RBI has raised the policy Repo rate by 100 basis points during Jul-Sep2022 quarter. And in response, bank lending rates, call money rates, Treasury Bill rates and 10-year G-Sec yield have gone up.
As is the case with banks in the last few decades, banks are slow in raising their deposit rates, but as is their wont they've raised their interest rates on loans in bigger proportion.
One notable feature of weak policy transmission of RBI monetary policy is slower rise in deposit rates with bigger increases in lending rates by banks -- which is having detrimental effect on savers, especially, senior citizens, exacerbated by runway inflation in the past three years.
For the past three years, savers in India have been suffering from negative interest rates. Unfortunately, there is not much discussion on this topic from the Indian media, which are completely dancing to the tune of those in power.
You can observe from the table, there has been no change in savings bank deposit rates in the past one year despite increases in RBI policy rates and elevated consumer price inflation. In a market economy, all rates across the spectrum should respond in tandem with the interest rate environment in the macro economy.
Similarly, there has been no change in small savings deposit rates (PPF, NSC and one-year post office deposit shown in the table) in the past one year -- as per government's own policy, small savings schemes' interest rates are supposed to move in tandem with government bond yields of similar maturity with a quarterly reset.
But the PM Modi government has been violating its own policy of "market-determined" interest rates on the small savings schemes. Nothing with the PM Modi government is market-determined, everything depends on political expediency and crony capitalism of giving special support to its preferred oligarchs. (PIB press release dated 16Feb2016 on "market-determined" interest rates on small savings schemes)
Update dated 16Jul2022 with new information as on 30Jun2022 >
As can be seen from the table given below, rates and ratios moved pretty fast between March 2022 and June 2022 as Reserve Bank of India (RBI), India's central bank, raised repo rate by 90 basis points (bp) in two instalments and cash reserve ratio (CRR) by 50 basis points during this period.
10-year G-Sec yield rose by almost 60 bp; but the biggest impact was in 364-day Treasury bill rate, which rose by 167 bp. In a rising interest rate scenario, short term interest rates tend to rise faster than long-term rates. Lending rates and deposit rates too started rising along with repo rate hikes.
But there is no change in savings bank deposit rates by banks. This stickiness in SB interest rates indicates lack of competition in Indian banking. RBI had one job: to protect the interests of existing banks.
Call money rate jumped by 137 bp to 4.71 percent and liquid mutual fund return for one year rose to 3.50 percent.
As monetary policy transmission is weak in India, term deposit rates barely rose by 10 or 15 bp; whereas lending rates have risen by 30 to 50 basis points.
Abbreviations used:
RBI - Reserve Bank of India
PPF - Public Provident Fund
NSC - National Savings Certificates VIII Issue
G-Sec - government security
References:
Tweet thread 16Feb2016
PIB press release 16Feb2016 - "market-determined" interest rates
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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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