Unkind cut

With inflation rates falling sharply and a clamour for lower rates to stimulate the economy, it was clear that the small savings schemes couldn’t remain an island of high returns for long. It therefore doesn’t come as a surprise that the Centre, while resetting these administered rates for 2016-17, has chosen to prune them across the board. But it is the quantum of these cuts that may come as a nasty surprise to small savers. Come April 1, long-term instruments such as the Public Provident Fund, Senior Citizens Savings Scheme and Sukanya Samriddhi Scheme will earn 60 to 90 basis points less, while Post Office Time Deposits will see their rates slashed by 100 to 130 basis points. While the Centre has tried to gloss over these steep cuts by stating that these are ‘formula-driven’ and based on the recommendations of the Shyamala Gopinath committee, the truth is that the rate cuts would have been far milder had they stuck strictly to the Committee’s recommendations.

It has now been four years since interest rates on small savings were made market-driven by pegging them to government security (g-sec) yields of similar maturity. There was considerable merit in such a transition, as above-normal rates on post office savings push up the cost of borrowings for the Centre and the States. But the present Government has chosen to make some gratuitous changes to the Committee’s formula which tilts the scales against the saver. For one, it has moved to a quarterly reset of rates instead of the annual reset specifically suggested to shield savers from excessive rate volatility. With rates on even long-term schemes such as the Public Provident Fund now set to float up and down every quarter, savers will find it almost impossible to make long term financial plans. Two, it has also ignored the recommendation that the annual rates never be revised by more than a 100 basis points, to avoid sudden jolts to savers. Here, the Centre needs to explain why the rates on long-term schemes have been slashed by 40-90 basis points, while comparable g-sec yields have dipped only by 10-20 basis points in the last year. Expecting savers to bear market risks is de rigueur in a deregulated economy, but then, such ‘market-linking’ shouldn’t allow any room for ad-hoc tinkering with the formula.

This drastic reset in rates seems to be triggered by vociferous complaints from the banking lobby that high small savings rates pose a threat to deposit flows, impeding lending rate cuts. But this threat is over-stated as small savings schemes (with ₹7 lakh crore) manage only a fraction of the assets parked with bank deposits (₹89 lakh crore). Moreover, with individual caps on investments in ‘high return’ schemes such as the Senior Citizen’s Savings Scheme (₹15 lakh), PPF (₹1.5 lakh) and Monthly Income Scheme (₹4.5 lakh), savers cannot allocate unlimited sums to them in any case. The Centre needs to address savers’ concerns when it reviews the small savings rates next quarter.

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