1. Small Saving Schemes interest rates: Govt needs to revisit announc

Small Saving Schemes interest rates: Govt needs to revisit announc

While the government had done well to announce resetting of interest rates—this was done to align small savings rate to market rates of government securities—every quarter instead of every year in February, the 10-bps cut in the last six months shows that it is still reluctant to follow its own order.

By: | Published: October 3, 2016 6:26 AM
While this is certainly good news for small investors, it adds to the burden of the banks who become more uncompetitive as they lose out to the postal department in terms of savings.

While this is certainly good news for small investors, it adds to the burden of the banks who become more uncompetitive as they lose out to the postal department in terms of savings.

While the government had done well to announce resetting of interest rates—this was done to align small savings rate to market rates of government securities—every quarter instead of every year in February, the 10-bps cut in the last six months shows that it is still reluctant to follow its own order. Given it had not revised the rates for July-September quarter in the previous review, the 10-bps cut in small savings for October-December quarter is certainly a welcome step. But an analysis of the market rates in the corresponding period shows, that it is well behind the curve in the recalibration exercise. In the six-month period that government provided a 0.1% rate cut, the G-sec yields flattened by 36-bps in case of one-year securities and over 50-bps in the case of five- and 10-year securities. Most important, the 25-bps spread between one, two- and three-year term deposits, KVPs, five-year recurring deposits and comparable G-secs the government had announced to do away with has widened to 30 bps in case of one-year term deposits and almost 100 bps in the case of KVP.

While this is certainly good news for small investors, it adds to the burden of the banks who become more uncompetitive as they lose out to the postal department in terms of savings. Though this may not matter now as lending growth is low, it would once economy picks up and banks need to lend more. In keeping the rate high, the government is also putting more pressure on its interest rate bill. With clamour for a rate cut growing, the government would do well to revisit the small savings rate again as banks may not be willing to cut lending rates, as they lose out on deposits.

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