By Joydeep Sen
To get a viewpoint on the interest price structure that is prevailing at the moment, let’s get started by searching at RBI repo price, the price at which RBI would lend revenue to banks for one day. That price is 4%, and is at an all-time low. The significance of repo price is that this is the needle that moves the interest price structure across the whole marketplace and economy. However, at the moment, the powerful price is the reverse repo price of 3.35%, substantially decrease than the repo price of 4%.
This is due to the phenomenon of banking method liquidity surplus banks are rather parking revenue with the RBI at 3.35% than availing at 4%. So what does this imply for you and me? The interest price structure in the economy is on the decrease side. Bank deposit prices are decrease than earlier.
Home loan prices, as per the ads, are screaming at a low of 6.5%. To be noted, 6.5% is on floating price, which would move up as and when the RBI hikes repo price. The fixed price loans are at a substantially greater price.
Context
Small savings prices, popularly identified as Post Office prices, are fixed by the government, and reviewed each and every quarter, as per a formula. The formula is, government safety yields (traded interest price levels) in the secondary marketplace plus a spread i.e., mark-up. As an instance, the spread on Senior Citizens Savings Scheme will be one hundred bps more than comparable maturity G-Secs (one hundred bps equal 1%). The rationale for linking it to G-Sec yields in the secondary marketplace is that it is in line with interest price movements G-Sec yield movements reflect the actual and anticipated events in the economy pertaining to price movement.
However, the prices fixed by the government on the quarterly reviews are greater than warranted by the formula of G-Sec yield plus defined spread. The greater tiny savings prices are helpful to the populace. But there is a flip side to it. As lengthy as the RBI was bringing down interest prices to make inexpensive revenue out there to pump the economy, to fight the pandemic-induced slowdown, it was counter-intuitive.
On March 31, 2021, tiny savings prices have been lowered drastically by means of a notification, only to be withdrawn the next day. Erstwhile prices have been maintained. Due to this drama, there was an expectation that prices may well be lowered in the next assessment on June 30. Rates have been maintained, and have been maintained lately on September 30 as nicely. As an instance, today, the price on NSC VIII Issue, which is a 5-year scheme, is 6.8% and that on a 5-year time deposit is 6.7%.
View forward
So far, the RBI has been on a price reduction cycle. As financial recovery gains traction, the RBI will adjust stance. Since tiny savings prices have been maintained in the reduction cycle, it is probably, now that we are in a neutral zone, prices will be maintained going forward. As of today, the corridor is wide among 3.35% and 6.8%, even just after providing anything for time worth of revenue among one day and 5 years, as per historical requirements. This is lop-sided from the macro viewpoint, but helpful for savers, specifically middle / decrease-middle revenue persons in rural regions.
The writer is a corporate trainer and an author