LIVING WITH LOWER INTEREST RATES

For the risk-averse investor, the options have shrunk dramatically. And Budget 2019 is unlikely to bring good news.

The interest rates on small savings schemes, a favourite among Indian household investors, have dropped to a multi-decade low. For example, interest on the ever- popular Public Provident Fund (PPF) is down to 7.6 per cent (January 2018) and on the Senior Citizen Savings Scheme to 8.3 per cent. The rate cuts have left in the lurch all those risk-averse investors, who swore by investments like the PPF which carry a government guarantee.

WHY HAVE INTEREST RATES COME DOWN?

Interest rates on small savings schemes (SSS) are now market-linked and formulae driven. They were linked to government bond yields in 2011 but were revised once a year. Since April 2016, the reset in interest rates has been done quarterly based on the average yield on government bonds of similar maturity in the previous quarter with the government paying a mark-up on this. The mark-up on PPF is 25 basis points (100 basis points is equal to 1 per cent). The formula is meant to align all interest rates in the economy. The fall in yield of government papers after the cut in repo rates by the Reserve Bank of India (RBI) has led the government to cut interest rates on small savings schemes.

Ladder 7 Financial Advisories founder Suresh Sadagopan says, “The government has been cutting interest rates to align small savings schemes to the overall interest rate scenario. It may not want to pay more than market rates as it increases its liability.”

Lovaii Navlakhi, MD and CEO, International Money Matters, says, “With falling inflation, the government decided to link rates on small savings schemes to inflation and policy rates. Otherwise, you would have a situation today where investors receive 4-5 per cent real returns on a low risk investment.” Being formulae driven also means that the rates on small savings will go up as and when yields go up—they have started to rise towards the end of 2017. So, it may be possible that the government will not cut interest rates further.

SHIFT TOWARDS RISKY ASSETS

Falling interest rates and the simultaneous buoyancy in the equity market have nudged people towards equity investments, which the risk-averse investor is uncomfortable with as an asset class. “It may not be the government’s intention to drive people towards mutual funds... but it’s happening alright,” says Sadagopan.

Equity mutual funds

LOW INTEREST RATES HAVE FORCED PEOPLE TO GRAVITATE TOWARDS EQUITY INVESTMENTS. EQUITY MUTUAL FUNDS GOT A MASSIVE INFLOW OF Rs 1.27 LAKH CRORE IN THE PAST TWO FINANCIAL YEARS, AS PER CMIE DATA