The rate cut on small savings schemes is being seen as an enabling move for banks to make borrowings cheaper, in line with the government’s and RBI’s efforts.
The interest rate cut on small savings schemes such as PPF and post office deposits may hit depositors’ incomes, but will likely make loans cheaper for borrowers, as the move could prompt banks to cut lending rates in line with RBI’s policy rates. The decision to cut small savings schemes interest rate by 70-140 basis points was taken for the first quarter of the current fiscal. The Reserve Bank of India and banks were urging the government to take this step, as higher interest rates on small savings schemes were preventing banks from passing on the benefits of monetary policy repo rate cuts to the customers. The rate cut on small savings schemes is being seen as an enabling move for banks to make borrowings cheaper, in line with the government’s and RBI’s efforts.
“With low interest rates in the small savings scheme, the deposits in banks may increase and the banks too may reduce the interest rates on deposits. This can eventually also give them a window to lower the lending rates,” Sameer Narang, Chief Economist, Bank of Baroda, told Financial Express Online. Once the deposit rates are cut, only then the lending rates can come down, he added.
High interest on deposits restricts banks to give loans at cheaper rates. In the calendar year 2019, the RBI had cut repo rate by 135 basis points in straight five Monetary Policy Committee (MPC) meets. Also, the interest rates were linked externally to the benchmark. However, the benefit of these measures could not reach end-customers due to multiple reasons. “At the bank group level, the transmission to deposit and lending interest rates has been uneven, reflecting idiosyncratic factors,” RBI said in its recent report.
To boost credit growth and liquidity in the market amid coronavirus pandemic, the RBI had once again slashed the repo rate by 75 basis points to 4.4 per cent last week. Meanwhile, the notification issued by the Department of Economic Affairs showed that the public provident fund (PPF) interest rates in the June quarter have been brought down by 80 bps to 7.1 per cent; Kisan Vikas Patra (KVP) by 70 bps to 6.9 per cent; and the girl child-focussed Sukanya Samriddhi scheme has been slashed by 0.8 per cent to 7.6 per cent.