Return
to Story Page
To print: Select File and then Print from your
browser's menu
FE NEWS SERVICE
The Government's decision to reduce interest rates on small savings (held with post offices) has been welcomed on two counts. First, small savings are growing at an embarrassingly rapid pace every year. This needs to be slowed down. Second, the interest on small savings is a benchmark for interest rates on bank deposits, bonds and other savings instruments. If this is lowered, lending interest to business will correspondingly decline. There is a certain merit in the first argument. In 1997-98, small savings collections exceeded the budget target by over 75 per cent. This order of excess over a higher target is also expected in the current year. Since small savings are available aplenty, it is but logical that the borrower, that is the Government, including the states, which tap the major chunk, should seek to save on the interest paid for them. But the assumption that the reduction in interest rates by a full percentage point will slow down the accretion of small savings with the post offices could turn outto be incorrect.
There are not many avenues that can attract savings from risk-averse investors. Small savings will continue to burgeon. The Government knows this. That is why it has prescribed a ceiling of Rs 50,000 a year on small savings per individual. This will shut out investors who have shied away from the financial markets: Unit-64, mutual funds, and FI bonds. But small savers, as commonly understood, will stick to the post offices. The governments will have to find ways to profitably use their savings. The interest on small savings cannot be reduced beyond a point -- so long as the average annual inflation bobs around 9 per cent (19 per cent so far this year, if measured by the consumer price index).
The immediate impact of lowering the `benchmark' rate has been nil. ICICI proposes to re-issue bonds at the same 13-14 per cent interest in the third week of January. This is logical. Unlike small savings, FI bonds are not entirely risk-free. True, small savings barred by the ceiling will now flowinto the banks. Over time, the banks may reduce deposit interest rates. But this is unlikely to bring down lending interest rates. Banks will widen their spread to cover NPAs. Hitherto, borrowers were penalised (through high interest) for NPAs; now depositors are to be squeezed to share the NPA burden. The gut issue in turning the recessionary tide is to reduce interest rates on term loans and on working capital. This is not addressed by current policy, nor is the question of targeting inflation to assure a positive real return to the investor.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
------------------------------------------------------------
This story was printed from Net Express located at http://www.expressindia.com. Net Express provides a portal to India, with news from The Indian Express and The Financial Express along with sites on travel and tourism, the entertainment industry, the power sector, the environment and much more.
------------------------------------------------------------