Low Interest Rates for Whom?

Reserve Bank of India (RBI) continues to keep policy rates low to support growth, despite rising inflation risk. The inflation rate increased to a six-month high of 6.3% in May surpassing the upper end of RBI’s tolerance band.

This stance of RBI in recent years has also helped banks in reaping the benefits with increase in their interest margin, that reached a 12-year high of 375 basis points (bps).

A recent study of 31 listed banks by the Business Standard shows that the combined interest income i.e yield on advances (YOA) and yield on investment (YOI), put together came down by 19 bps to 8.23% in FY21, while the interest expenses i.e. cost of funds or deposits (COF) decreased by 50 bps to 4.48%.

It shows that the COF or deposit rate has been drastically cut, while YOA or lending rate has come down only marginally.

It clearly indicates that the benefit of low repo rate stance of RBI has not been passed over by banks to borrowers, while the depositors had to content themselves with much lower interest income. RBI had been coming heavily on banks for passing the benefits of low rates to borrowers to augment growth, but to no avail.

Private sector banks have beaten Public Sector Banks (PSBs) in this respect too. Their interest margin increased to 423 bps in FY21 from 412 bps in FY20, while that of PSBs increased by 349 bps compared to 306 bps in FY20.

Due to a steady rise in inflation, it seems that the COF i.e. the interest paid to depositors by banks have bottomed out, which may be a saving grace for depositors, especially senior citizens, whose main source of income is the interest earned on their fixed deposits.

It is however, to be noted that the deposits of banks in FY21 increased by 11.8%, and advances by 10.3%, while investment in bonds and liquid assets increased higher by 17.3%.

The moot point is that if the very purpose for which the rates are being kept low by RBI is defeated, the depositors should not be unnecessarily put to hardship by lowering their interest income.


–Kaushal Kishore

4 Comments

    1. This rule may look appealing, but generally not feasible in today’s world. How can a bank run without lending, and how can an industrialist run business without borrowing? In fact, borrowing is now an essential part of financial planning. But thank you, Joanna for telling about this rule.

      Liked by 1 person

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