Excess liquidity nullifies relevance of small savings rates

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New Delhi | April 5, 2017 8:42 PM

The ongoing liquidity surplus, which is pegged at around Rs 4 trillion, can help reduce the relevance of regular small savings rates in deciding bank deposit rates, says a report.

Icra said the 0.20 per cent cut small savings rates during the year to April 2017 is “far short” of the decline in government bond yields, to which they are linked. (Reuters)

The ongoing liquidity surplus, which is pegged at around Rs 4 trillion, can help reduce the relevance of regular small savings rates in deciding bank deposit rates, says a report.

“Given the continuing systemic liquidity surplus, liquidity management measures and rate action by the Reserve Bank are likely to drive deposit rate further down this year, reducing the relevance of timely changes in the small savings rates for policy transmission,” Icra said in a note.

The excessive liquidity of Rs 4 trillion thanks to the note ban, coupled with a relative stickiness in small savings rate has helped banks by ensuring that more money does not come their way as deposits.

“The limited decline in small savings rates has also made them relatively more attractive to bank deposits, which appears to be a relief for banks that is already flush with funds,” it said.

A dip in interest on the small savings like PPF has been flagged by RBI as a key for policy rate cuts because an elevated structure hurts transmission.

Icra said the 0.20 per cent cut small savings rates during the year to April 2017 is “far short” of the decline in government bond yields, to which they are linked.

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The relative attractiveness of the small savings rates is likely to help achieve government’s borrowing target from this avenue of Rs 1 trillion in 2017-18, it said, adding however, this borrowing will be at a higher rate than government’s market borrowings.

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