Does Covid-19 have affected the Interest Rate of Digital Savings Account?

 

With the Covid19 outbreak, the central banks globally have infused an incredible amount of liquidity in the markets to prevent the economic fallout. There is no difference for the Reserve Bank Of India as the apex body has also announced a slew of measures to handle the distress. Under various tranches, including a digital savings account, the RBI has lowered the repo rate to 4 percent.

It earlier back in 2019, stood at 6 percent. The aggregate reduction in FY20 was 160 bps. But the current argument is that transmission of the interest rate with regards to digital savings account is not as swift as it should be. Recently, the most accepted benchmarks are the lending rate, which is defined by the MCLR or base rate. Furthermore, it is also linked deposit rate, which has to be altered first as it goes into the cost of funds.

The loan is most likely to get repriced immediately. On the other hand, new and renewed deposits go at the new rate. The average cost's impact is most likely to come with a lag. Thus there is a theoretical reason for the transmission to be slow, which is most likely to last for at least six months if the banks reduce the deposit rates. If you are looking forward to gauging the state of liquidity, then you may look at the markets as the government bond. Ideally, it is one of the best ways to use the indicator as risk-free.

What happens to the market during the covid19 pandemic?

Interest rates play a crucial role in the economy. Be it niyo savings account or others; almost all accounts are affected by the recession caused due to the pandemic. The interest rates are ideally the interaction of supply and demand for credit.

As the outbreak of recession, there is a boost demand for liquidity. Businesses tend to depend upon credit to cover their operations when the sales are decreasing. Like any other thing, niyo savings account when demand increases and supply decreases, prices rise sharply. So all you can expect that the interest rates will increase as the recession begins.

What is the role of the central bank?

A central bank is said to have the ability to influence interest rates. It is mainly done through the buying and selling of debt instruments. When the interest rate is low, the savings tend to be discouraged, which hurt savers who now receive a lower return.

The new credit policy is said to encourage businesses to use more resources in their investment projects. Additionally, consumers tend to consume more resources. Often policymakers take this step to not only support the economy but also to promote growth during times of crisis.

Thus, covid19 pandemic is one of the most severe challenges faced by financial institutions globally. The retail banks face a lot of trouble that need concrete steps to reposition now.