Inflation is creeping back into conversations about Indian politics. In this context, two recent observations in RBI’s publications are pertinent. The central bank pointed out that growth in small saving deposits has been consistently above bank deposits since 2018. Also, GoI has left interest rates on small saving instruments (SSIs) unchanged for six straight quarters, or 18 months. Interest rate changes on SSIs are carried out by GoI. The extent of change however is determined by a formula that is based on a relevant government security’s yield.

GoI’s inertia has not really made a difference. Since February 2019, RBI has used all its instruments to push down interest rates as it prioritised reviving economic growth. Between February 2019 and September 2021, RBI’s policy rate, or repo, declined by 2.5 percentage points. Median term deposit rates of banks for fresh collections dropped by 2.13 percentage points during the same period. In fact, deposit rates fell more than lending rates. This period also coincided with a rise in retail inflation, which has been higher than RBI’s repo rate for a long time. There’s a simple explanation for this anomaly.

Interest rates, especially for short-duration loans and deposits, are more influenced by RBI’s actions than by market forces. RBI has a variety of tools to influence yield on government securities, which serve as a benchmark for others. Monetary policy since February 2019 has pushed down all rates. Except the ones set by GoI. GoI’s actions are influenced by electoral dynamics, among other things. This dimension cushions small savers during phases when deposit rates are out of sync for long periods from the level of inflation. It’s a system of checks and balances and not a fault line in the financial system. It likely prevents financial instability arising out of a mismatch between deposit rates and inflation.



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This piece appeared as an editorial opinion in the print edition of The Times of India.



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