Since 2015, RBI has reduced repo rate 10 times. From a high of 8%, it has now been reduced to 5.5%. It is a reduction by nearly 31.25% in absolute terms over 4 years. Every time repo rate is reduced, RBI starts to pressurize banks to pass on the benefit the borrowers. Banks on the other hand claim their helplessness in transmitting the interest rate reduction. Although bank interest rates have come down in last 4 years by some bit, it is nowhere close to the Repo Rate reduction. In fact, between January 2019 to May 2019, the Weighted Average Lending Rate by banks has gone up from 10.38% to 10.41%. Very recently, another effort to reduce the cost of borrowing has been made by PSU banks. SBI and other PSU banks have announced that their home loans interest rates will now be aligned to Repo Rate. This certainly reduces the cost of loan by 0.75% (approx.) in comparison to MCLR basis.  But is this enough to pump prime the economy?  Is there more scope to reduce the Repo rate? Can banks offer further reduction in interest rates? Answers to these questions lie in solving the following 3 puzzles:

1.  Declining Household Savings:

An average Indian household is saving lesser in comparison to what it was saving 10 years back. Indian household’s savings peaked at 23.6% of GDP in FY 12. In comparison, FY 2018 date shows a figure of 17.2% of GDP. Household savings have been an important source of CASA accounts for Banks. This source is drying up. On the other hand, consumption of Indian household is continuously increasing. Households are demanding more credit. Gross household debt was 9% of GDP in 2014. This has increased to 11.5% in 2018. Another reasons that Indians are saving less is possibly due to bad jobs environment. As per CMIE, we are at nearly 8% unemployment rate. This is highest since 1972. Economic Times has reported that private sector salaries are that their worst in the last decade (in terms of growth). Inflation too is eating into the savings of Indian households. Country’s Headline inflation may be running low between the range of 3% to 4%, but average Indian lifestyle inflation is surely running high (7% to 8% on an average). Over last one year, rural sector income growth has also been very muted. One of the reasons is low MSP growth in agri sector.

2. Higher NSSF interest rate yields & other alternatives to bank:

Small Savings Schemes like POST Office MIS, KVP and other govt led schemes offer much better return than bank deposit. While SBI may offer 5 years fixed deposits at 6.85% p.a., Post Office MIS can offer 7.70% p.a. Therefore, large number of small savers are actually flocking to such schemes, rather than parking their money with banks. The chart below shows nearly 3X increase in investment over last 5 years. This is an unprecedented growth rate in small savings at the cost of bank deposits.

Similar to Small Savings, Mutual Funds have also garnered a disproportionately large share away from Banks. Thanks to ad campaigns like “Mutual Funds Sahi Hai?”

3. Bank NPAs :

Bank NPAs have been at the epicentre of country’s economic woes. Not Perming Assets apply brakes on credit cycle, impacts the profitability of borrowers and lenders. To bail them out, government spends tax payers money , which otherwise should go for infrastructure development. Since 2011, almost all categories of bad loans have risen except Retail category (See Graph below). Until the new NPA formation doesn’t stop, we will see pressure on liquidity which will not let interest rates come down.

Source :


But is there a Hope !!

As per the chart below, NPAs are showing a receding trend. This looks sustainable. Gradually we will witness faster reduction in outstanding NPAs. That will be a big boost to economy and should ease the credit crunch.



By Sameer Rastogi

18 years of experience, PG in Finance and has delivered Wealth Management lectures at IIM Lucknow, IBS Gurgaon and IIPM Delhi. Contributed to various newspapers. Strength – Application of Economic fundamentals to Investment

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