The demonetisation knock: Borrowers gain, savers lose

With the RBI embarking on its rate easing cycle in January 2015, interest rates in the economy have been trending lower over the past two years or so. But the modest fall in rates accelerated post demonetisation, due to the excess liquidity sloshing around in the banking system. Aside from deposit and lending rates falling sharply, the note ban proved to be a shot in the arm for bond markets. The aggressive buying of government securities by banks flush with funds led to a substantial fall in yields, cheering bond investors. Here’s a look at how demonetisation impacted borrowers, depositors and investors over the past year.

Back-track to November of last year, and unpleasant memories of the aam aadmi queueing up for hours to exchange old notes and withdraw cash from ATMs is what springs to mind immediately. While the cash crunch eased in the subsequent months, the lingering impact on rates has left savers and depositors in a fix.

From April until November 2016 (before the demonetisation move), deposit rates had fallen by 30-50 basis points in leading banks across various tenures. But with bank deposits swelling post the Centre’s move to scrap old high-denomination notes, deposit rates fell by a substantial 50-100 basis points across banks between November 2016 and February this year.

Many banks have continued to tinker with deposit rates, trimming them by as much as 50-75 basis points in recent months too. But aside from lowering rates on fixed deposits, in an unprecedented move, SBI cut its savings deposit rate, which had been unchanged since 2011. The reduction in savings deposit rate only added to depositors’ woes, as other banks have been quick to follow suit.

Looking ahead: While steep cuts in deposit rates are unlikely, banks may continue to tinker with deposit rates to ward off margin pressure on account of weak credit growth.

While depositors have been hit hard, borrowers have had enough reason to cheer. From the beginning of January 2015 (when the rate easing began) until now, banks’ weighted average lending rate (on outstanding loans) has fallen by 120-130 basis points. On fresh loans, the fall in lending rates has been higher by around 180 basis points.

Much of the fall in lending rates was triggered post demonetisation, due to the surplus liquidity. Taking a cue from the largest lender SBI, which slashed its benchmark lending rate by 90 basis points in January this year, other banks too cut their lending rates by 70-80 basis points.

Since then, however, across the board, significant reduction in lending rates has not happened. Since the August policy (when the RBI last cut rates), only a few banks cut benchmark lending rates by a notable 20-30 bps. Others have maintained status quo or at best trimmed MCLR by 5-10 bps.

While, overall, demonetisation has led to meaningful cuts in lending rates, transmission issues between different categories of borrowers have been a dampener of sorts, which the RBI is now trying to resolve.

Looking ahead: Borrowers should quit playing the waiting game and lock into best rates. Though the RBI’s future actions will be data dependent, for now the window for further rate cuts looks limited.

Bond yields, which were stubbornly high at 7.7-7.8 per cent through most of 2015, fell sharply in 2016 by about 120 bps. The fall was triggered by two key events. First, the RBI’s decision to move to a neutral liquidity scenario in the April 2016 policy, by conducting open market operations (OMOs) — buying of government bonds. Then, the Centre’s demonetisation move that led to aggressive buying of government securities by banks flush with funds.

However, the RBI shifting its policy stance from accommodative to neutral in February this year saw bond yields inching up. Yield on G-Sec went up to 6.8-6.9 per cent levels between March and April, before heading south once again on favourable inflation numbers.

Over the past two months, with markets factoring in limited (or no) rate cuts, yields have been creeping up once again.

Looking ahead: Near-term triggers for a significant fall in yields look elusive. Investors should stay clear of duration calls (betting on rate movements) and instead invest a chunk of their debt fund investments in short-term income funds that carry less volatility in returns.

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