India to lower interest rate on small saving schemes
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.