The general decline in government security rates coupled with the Reserve Bank of India’s monetary easing and steps to boost liquidity could bring down the interest rates on small savings by another 20-25 basis points for the July-September quarter, India Ratings said on Wednesday. Though this is bad news for small savers, who had seen sharp rate cuts for the current quarter, the ratings firm said the relaxation of the rigidity of small savings rates as a result of a government policy to align them with the market could improve the viability of the National Small Savings Fund (NSSF).
With persistent income-expense gap over the years, the NSSF’s cumulative deficit had risen to Rs 1,0,3716 crore or 0.76% of gross domestic product (GDP) by the end of FY16, the rating agency noted.
The Modi government has asserted that it favoured a low interest rate regime at this juncture, given the need to stimulate investments and consumption.
To enable more expeditious monetary transmission by banks, the government on March 18 had announced a cut in small savings rates ranging between 40 and 130 basis points, ushering in a regime of market-aligned quarterly resetting of small savings rates benchmarked to G-secs. When the RBI stressed the need to improve the transmission of its rate reductions into the money markets and retail bank lending rates, banks had
cited the stickiness of the small savings rates — which competes with their fixed deposit schemes — as one
of the reasons for their inability to ensure full and timely transmission. Although this view of the banks has been given some credence, India Ratings, however, pointed out that small savings deposits as a proportion of banks’ time and demand deposits declined to 9.86% in 2015-16 from 28.26% in 2004-05.
In its first bimonthly review for 2016-17 on April 5, the RBI cut the repo rate by 25bps to 6.5% and said that it would maintain an accommodative policy stance. The RBI has also narrowed the policy rate corridor to plus/minus 50 bps from plus/minus 100 bps by reducing the marginal standing facility rate by 75 bps and increasing the reverse repo rate by 25 bps to address tight liquidity and monetary transmission issues.
“No doubt this (the likely reduction in rates) will have implications for the large number of small investors who primarily live on the interest income generated by small savings, the viability of the scheme is equally important otherwise it will collapse under its own weight,” India Ratings said.
The average interest earned by NSSF on the funds collected under small savings has been less than 8.5% since FY13 while the interest paid to depositors has remained in excess of 8.6%. “Even in FY17 average interest earning of NSSF is likely to be 8.3% and average interest pay out 8.5%,” India Ratings said.
On the other side, high cost of NSSF funds has forced states to tap the market to bridge the fiscal deficit, leaving higher amounts of these funds to be used by the Centre to finance its fiscal deficit and partly by the India Infrastructure Finance Company.