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Investors may be unhappy about the cuts announced in the interest rates on small savings schemes for the next year.
These rates are calculated based on the average yields on government securities in the preceding year.
But the new small savings rates are quite competitive in relation to alternative instruments such as bank deposits.
The government has reduced the rates offered by small savings schemes only by 10 basis points (0.1 percentage point) for the year beginning April 2013.
Contrast this with the sharp decline in interest rates in this period. Between April 2012 and now, RBI has cut its own policy rates by 75 basis points. Banks have slashed their deposit rates by a similar degree. Three-year bank deposits, which offered an average interest of about 9.25 per cent last April, now pay only 8.7 per cent.
Five-year deposits have similarly slashed average rates from about 9.25 per cent to 8.6 per cent.
What is important for savers is that the new interest rates on post-office schemes will apply for one full year. But market interest rates are expected to dip further in the year ahead.
Expectations are that RBI will trim its own policy rates by another 75 basis points at least over the next 12 months.
But why has the government refrained from sharper rate cuts on post office schemes? It could have saved some money by doing so. It could be because it is keen to woo Indian savers back to these schemes. Small savings schemes, far from receiving fresh money, have actually seen investors pull out money (on a net basis) to the tune of about Rs 12,000 crore so far this fiscal.
Bank term deposits in this period have seen an addition of about Rs 7,50,000 crore.
The latest rates, however, should give small savings a fighting chance.
The interest offered on the five-year post office schemes and National Savings Certificates, now reset at 8.3-8.4 per cent, are quite close to the average rates offered by similar bank term deposits, which pay 8.6 per cent on average.
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