Banks are unlikely to cut deposit rates despite the recent cut in interest rates on small savings schemes by the government, ratings agency Icra said on Friday, given a liquidity deficit in the system and an expectation of the deficit persisting into Q4 of FY18. Earlier this week, interest rates on small savings schemes—linked to government bond yields—were reduced by 20 basis points (bps) for the fourth quarter from the rates offered in the third quarter. The move stands out in stark contrast to the spike seen in government bond yields, of various maturities, in the recent past. In a report, Icra said that since banks are unlikely to reduce deposit rates in the immediate term, the attractiveness of small savings schemes would moderate. “While the present interest rate offered by the one-year time deposit small savings scheme is similar to the one-year median deposit rate offered by banks, the spread nevertheless remains substantial at 30-95 bps for maturities higher than three years,” analysts at Icra wrote.
Consequently, inflows into small savings schemes are likely to remain strong in the March quarter. This, in turn, should help reduce the extent of further expansion in the issuance of government bonds in the third quarter beyond the Rs 50,000 crore announced on Wednesday, Icra said. “Healthy small savings collections may help to contain the uptick in G-sec (government security) yields, despite continuing uncertainty around the extent to which the government of India’s (GoI) fiscal deficit for FY2018 would exceed the budgeted target of 3.2% of GDP (gross domestic product),” the agency added. One of the reasons banks cite for poor transmission of rate cuts by the regulator is the high interest rates on small savings schemes. Since bank deposits compete with such schemes, banks cannot afford to slash deposit rates drastically. The schemes include the National Savings Certificate (NSC), Sukanya Samriddhi Account, Kisan Vikas Patra (KVP) and Public Provident Fund (PPF).