In­dia to lower in­ter­est rate on small sav­ing schemes

The Pak Banker - - BUSINESS -

In a move that will im­pact small in­vestors, the govern­ment will lower in­ter­est rates on sav­ings schemes with a ten­ure of less than five years, such as short-term de­posits in post of­fices, ef­fec­tive 1 April.

The cut will mark the start of a quar­terly re­view of small sav­ings in­ter­est rates, mak­ing the process of rate-set­ting more dy­namic and mar­ket-linked. The ex­tent of the rate re­duc­tion wasn't spec­i­fied.

"From now on, such in­ter­est rates will be re­viewed ev­ery quar­ter in­stead of the cur­rent prac­tice of re­view­ing them an­nu­ally. A no­ti­fi­ca­tion to this ef­fect will be is­sued in a day or two," eco­nomic affairs sec­re­tary Shak­tikanta Das said on Thurs­day. Das said the ob­jec­tive is to make sav­ings rates as closely aligned to the mar­ket as pos­si­ble. The govern­ment will, how­ever, main­tain the in­ter­est spread for so­cial se­cu­rity schemes tar­geted at girl chil­dren and se­nior cit­i­zens.

"Tak­ing into con­sid­er­a­tion the in­ter­est of small savers and some so­cial sec­tor schemes of the govern­ment, the rates un­der the girl child sav­ings scheme and the se­nior ci­ti­zen sav­ings scheme will con­tinue as it is. They will have the quar­terly ad­just­ment but what­ever spread they are hav­ing over the G-sec (govern­ment se­cu­ri­ties) rates will not be al­tered. "Sim­i­larly, all long-term sav­ings will con­tinue to have the spread they have. At the shorter range of the curve, the ef­fort has been to re­duce the spread so that the re­duc­tion in pol­icy rates are passed on to the small sav­ings rates. But on the long range of the curve, the spread will be pro­tected. We have taken into con­sid­er­a­tion the in­ter­ests of the small savers and the need to also en­cour­age long-term small sav­ings," he added.

The in­ter­est rates of small sav­ing schemes are linked to the yields of govern­ment bonds. The move is ex­pected to al­low banks to pass on pol­icy rate cuts by the cen­tral bank through lower lend­ing rates. Banks blame high short-term in­ter­est rates on small sav­ings schemes for high cost of de­posits, which pro­hibit them from pass­ing on pol­icy rate cuts to bor­row­ers in a sig­nif­i­cant way. While the Re­serve Bank of In­dia (RBI) has cut pol­icy rates by 125 ba­sis points (bps) in the past year, banks have low­ered lend­ing rates only by 70 bps. One bps is one-hun­dredth of a per­cent­age point.

Af­ter RBI raised con­cern over lim­ited trans­mis­sion of its pol­icy rate cuts in Septem­ber last year, fi­nance min­is­ter Arun Jait­ley an­nounced that the govern­ment will re­view in­ter­est rates on small sav­ings schemes.

On the volatil­ity in the stock and cur­rency mar­kets, Das said In­dia was not an ex­cep­tion and was ac­tu­ally bet­ter off com­pared with many other mar­kets. Suresh Sadagopan, founder of Lad­der7 Fi­nan­cial Ad­vi­sories, said though the cut is good news for banks, in­vestors will lose out on some ad­di­tional in­ter­est. "If govern­ment in­cludes Na­tional Sav­ing Cer­tifi­cates, where a huge amount of money is de­posited, in the quar­terly re­view, then an­other ar­bi­trage op­por­tu­nity for in­vestors will also be lost," he added.

On the stock mar­ket and cur­rency mar­ket volatil­ity, Das said In­dia was not an ex­cep­tion and bet­ter off than many other mar­kets. "The govern­ment is keep­ing a close watch on the global de­vel­op­ments and govern­ment is pre­pared to deal with all the chal­lenges," Das said.

He said the growth fore­cast for the cur­rent year at 7.6% is note­wor­thy and sig­nif­i­cant. "It is re­flec­tive of the fact that amidst global cri­sis, In­dia is able to show growth which is ro­bust un­der the cir­cum­stances," Das added.

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