FM Arun Jaitley must cut rates on small savings by at least 50-75 basis points if he wants to usher in some kind of a level-playing field.
With the Reserve Bank of India (RBI) having trimmed the repo rate by 50 basis points in the monetary policy review, everyone’s looking to the banks to cut lending rates. Banks, for their part have been readying to cut rates by dropping deposit rates over the past year – one year deposits now fetch less than 8% at a host of banks. But they will still be reluctant to lower loan rates meaningfully for two reasons. For one, the longer-term deposits would take time to reprice but more importantly, with the economy still in a trough and consumer confidence low, they are unlikely to see too much incremental demand. So it doesn’t help them to lower base rates by more than 20 bps or so because their margins will take a hit.
Moreover, as they continue to drop deposit rates, banks run the risk of jeopardising their deposit franchise because interest rates on small savings are now way more attractive. So, one can make 8.7% on a PPF scheme, up to a ceiling of Rs one lakh of course, with a lock-in, while a five year recurring deposit at a post office can fetch savers 8.4% which is almost 100 bps more than what banks offer. At the shorter end too rates on post office schemes are much higher than those on bank deposits – two-year deposits fetch 8.2% which is something no bank will be able to afford once they start re-aligning the rates. The monthly income schemes are perhaps the most attractive since they offer 8.4%.
One could argue that the vast majority of savers plump for bank deposits but if the difference in the returns is so high – which it is now – many small savers will shift to small savings schemes. The rate of growth of deposits has been at sub-12% for almost a year now.
FM Arun Jaitley must cut rates on small savings by at least 50-75 basis points if he wants to usher in some kind of a level-playing field. Else, more savings will find their way into post office schemes pushing up the government’s interest bill.
Also, he needs to ensure better recovery of taxes from earnings on these schemes given interest earned from bank deposits is subject to tax deducted at source.
Although inflation has eased – CPI is now 3.66% – the absolute level of prices remains high thanks to the raging inflation seen in the past couple of years. Given the economy is yet to revive there’s not too much disposable income left in the hands of consumers and consequently little propensity to save. That’s one reason why the rate of growth of deposits slipped to a 50-year low some time back. In an aspirational economy, households need to be prompted to save. And Jaitley needs to do his bit.