1. Small savings rates: Why government must bring parity in returns of all financial products

Small savings rates: Why government must bring parity in returns of all financial products

When the government, in March last year, announced the plan to reset interest rates on small savings every quarter, most thought it would usher in an era of low interest rates, in keeping with the falling rates on government securities (G-Secs).

By: | Published: July 7, 2017 4:56 AM
savings rates, small savings rates, savings tips for salaried person, savings in small fraction If rates on small savings were to come down—the tax breaks on many make them even more attractive—banks would be in a position to lower deposit rates and, therefore, lending rates.

When the government, in March last year, announced the plan to reset interest rates on small savings every quarter, most thought it would usher in an era of low interest rates, in keeping with the falling rates on government securities (G-Secs). As the government press release put it, the move “is expected to help the economy move to a lower overall interest rate regime eventually and thereby help all, particularly low-income and salaried classes”. If rates on small savings were to come down—the tax breaks on many make them even more attractive—banks would be in a position to lower deposit rates and, therefore, lending rates. The problem, however, is that despite the announcement—even spreads over G-Secs were announced like, for instance, 75 bps for the Sukanya Samriddhi Yojana and 100 bps for Senior Citizen Savings Scheme—rates have not come down commensurately. Which is why, in February, RBI said interest rates would come down faster if rates on small savings came down—these rates, the central bank said, “are about 65-100 basis points higher … compared to what they should be if the formula is followed”.

So while the government has cut rates on small savings by 10 bps for the second successive quarter, the interest rate on the tax-free Public Provident Fund (PPF) has been set at 7.8% for July-September—after factoring in the 25 bps spread that was announced for this product, the rate should have been around 7%; an 85 bps extra return, apart from generous tax incentives makes the PPF far superior to anything a bank can offer. While SBI offers 6.25% on a five-year deposit, the same scheme in a post office fetches 7.6%, a full 55 bps higher than it should be based on the formula announced by the government—a five-year NSC offers an even higher 7.8% interest rate which is 75 bps more than what the formula warranted.

At a time when inflation was high, the government wanting to protect those investing in small savings rates still made sense. Today, however, inflation levels are at almost historical lows, making the real return much higher than in the past. With CPI at 2.18% right now, the five-year NSC has a real return of 5.6% and the Sukanya Samriddhi Yojana offers 6.1%. Apart from the fact that not cutting rates enough is hindering monetary transmission, from the point of efficiency, the government must adhere to its own set rules and bring in parity in returns of all financial products of similar risks.

  1. Ashok Kapoor
    Jul 7, 2017 at 2:44 pm
    It is Shameful that BJP govt down fall rate of interest every quarter. Some people are dependent upon thei income received from interest hence it is requested rate of interest should be increased from the next quarter​ failing which there is no seat of in next Lok Shaba election.
    Reply
    1. A
      Apte
      Jul 7, 2017 at 8:36 am
      1. It is inappropriate and unfair to compare rate of interest on SBI fixed deposits with that of fixed deposit in Post Office. 2. As regards interest on PPF, let us not compare interest on PPF with that of SBI fixed deposit but with similar retirement fund, (PF). Here it is interesting to note that even as the Union Finance Ministry (UFM) is keen to reduce interest rates on national savings schemes, the Union Labour Ministry (ULM) is making all efforts to pay interest on Provident Fund (PF) accumulations which is not in line with UFM’s proclaimed objectives. For FY 2016-17 the ULM and UFM approved rate of 8.65 percent on PF accumulations. For current FY 2017-18 the ULM, it was reported yesterday, would like to maintain that rate of interest. When that is the scenario why not pay more on PPF?
      Reply
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        Palengri
        Jul 7, 2017 at 8:09 am
        Wise men defined subject STATISTICS as science of lies. Economist say that today, inflation levels are at almost historical low. Have they checked up with their wives what is the rate of tomato and other vegetables? Probably no.Then they will know the truth.So the definition of statistics appears to be correct.
        Reply

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