Due to the COVID – 19 outbreak the economy has been badly affected. This disease has resulted in heavy loss for the economy. The lockdown announced in the whole country has resulted into economical crisis. Quite prudently there are no projections made on what the numbers will look like as it is hard to guess how long the virus shutdown will stay and affect individuals and industry. Therefore, the development agenda which is a part of the policy is directly linked to making the system work towards augmenting the flow of credit. The RBI had brought in the concept of LTRO (Long Term Repo Operation) in the February policy to provide fixed cost funds for longer tenures to banks which were well received. However, the funds did not get translated to higher lending either because of the reluctance of banks to lend or absence of demand for credit.
To calm the nerves of a stock market gripped by bears and to help liquidity conditions in the economy, the Reserve Bank of India (RBI) governor, Shaktikanta Das cut key policy rates on Friday. This rate cut intervention by RBI has come after central banks across the world announced rate cuts to stave off a coronavirus-related recession.
Although this might soothe the nerves of equity investors and reduce EMIs for borrowers, this is just more bad news for fixed deposit (FD) investors.
The RBI, today, cut the repo rate and reserve repo rate by 75 basis points and 90 bps, respectively (100 basis points/bps = 1 per cent). The repo rate now stands at 4.4 per cent and reserve repo rate at 4 per cent. The apex bank last cut rates in its October 2019 monetary policy review. This monetary policy review of the RBI was rescheduled in wake of pandemic which originally scheduled to take place on March 31, 2020 and April 3, 2020.
Here is a look at how today’s rate cut will impact fixed deposit (FD) investors and borrowers, both existing and new.
Interest income from FDs likely to fall further
The latest rate cut is likely to cause more heart ache for FD investors, especially senior citizens who are dependent on interest income. Despite RBI keeping key rates unchanged since December 2019, major banks have continued cutting interest rates on fixed deposits. The country’s largest bank, State Bank of India (SBI), has reduced fixed deposit rates back-to-back in February and March.
According to a Times of India news report, this is the first time that the SBI’s fixed deposit rates have fallen below 6 per cent since August 2004.
Those investors looking for fixed income avenues, can consider investing in small saving schemes as an option. These include National Savings Certificates (NSC), Kisan Vikas Patra, Post Office Term deposits etc. At present, these schemes are earning more than FD rates offered by some of the big banks.
Further, if you are looking for a fixed income avenue, now is the right time to consider small savings schemes, as interest rates on these products are due for review on March 31, 2020. There is a likelihood that interest rates on small savings schemes will be reduced given the current state of the economy. However, remember that most of the higher yield small saving schemes come with long lock-in periods.
Congress leader P Chidambaram on Friday welcomed the RBI decision to cut repo rate and its other measures to infuse more liquidity into the system.
He, however, said RBI’s direction on deferment of EMI payments is ambiguous and half-hearted.
“The demand is that all EMI due dates must be automatically deferred.
“I had suggested that all due dates falling before 30 June may be deferred to 30 June. Borrowers have been made dependent on the bank concerned and will be disappointed,” the former finance minister said.
Repo rate is the rate at which the central bank lends money to commercial banks in the event of any shortfall of funds. It is used by monetary authorities to control inflation.
Congress spokesperson Jaiveer Shergill said the government’s economic package announced on Thursday was inadequate and sought more steps to address the fallout of the coronavirus pandemic.
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“Government COVID2019 Economic Package is case of ‘Oonth Ke Muu Me Jeera-Too Less for the Ones Who Need More’ as $22.5 billion not enough for 135 crore population (Singapore 58Lac-Grant USD 33billion)
“44 Crore plus informal labour force left out. Extend EMI Moratorium to farmers,” he said.
Shergill said he welcomed the move by RBI to announce EMI moratorium but following needs to be done and clarified.
“Extend moratorium to farm loans. Clarify whether moratorium extends to student/education loans. Clarify whether definition of ‘borrowers’ include individual loan borrowers as well,” Shergill said.