Small savings expected to be an attractive alternative to bank deposits, says ICRA

Credit rating agency ICRA expects small savings schemes to provide an attractive alternative to bank deposits in the coming months.

After remaining unchanged for two quarters, the interest rates on small savings schemes, which are linked to the yields for G-Sec, will be hiked by 30-40 basis points (bps) for the quarter starting October 1, 2018 relative to the quarter starting July 1, 2018. One basis point equals one-hundredth of a percentage point.

This is largely in line with the uptrend displayed by G-Sec yields of various maturities, during the trailing three month period.

ICRA assessed that systemic liquidity is expected to tighten in H2 (October 2018-March 2019) FY2019 due to the upcoming harvest, festive and marriage season, state elections and busy season for credit. “While this would nudge banks to increase their deposit rates in Q3 (October-December 2018) FY2019, the extent of the same would lag the overall increase in the repo rate and the magnitude of the recent revision in small saving rates..”

“As a result, we expect small savings schemes to provide an attractive alternative to bank deposits in the coming months, which should help the GoI to avail a higher net amount from the NSSF, compared to its target of Rs. 1 lakh crore in FY2019,” opined the agency.

In line with the trend so far in FY2019, the agency doesn’t expect the upcoming rate hikes (by RBI) to be fully transmitted to bank deposit rates, despite an expected tightening of liquidity in H2 FY2019.

Given the weak capital position of most public-sector banks (PSBs), ICRA observed that their credit growth is likely to remain limited in FY2019, which would curtail their incremental deposit requirements and the need to attract additional funds by hiking deposit rates.

It elaborated that some PSBs, which are relatively better placed on capital such as the State Bank of India (SBI), Canara Bank and the Bank of Baroda, may pursue credit growth, but the incremental hike in their deposit rates is likely to be limited because of reduced competition from other PSBs.

“While private banks (PVBs) are in a position to pursue substantial credit growth and gain market share at the cost of the PSBs, they have not been able to make a large dent in the deposit franchise of the latter, despite offering somewhat higher deposit rates than PSBs,” said ICRA.

“An increase in deposit rates by PVBs may not necessarily result in a meaningful gain in their share in deposits; hence, they are likely to undertake modest calibrated hikes in their deposit rates in the immediate term,” said ICRA.

Referring to the looming inflation risks, the robust GDP growth print for Q1 (April-June) FY2019 and the continued weakening of the Rupee, the agency said these suggest a high likelihood of a third consecutive rate hike of 25 bps by the Monetary Policy Committee (MPC) in the October 2018 policy review.

“This is likely to be accompanied by a change in stance to withdrawal of accommodation, to signal another potential rate hike in the December 2018 policy review, unless inflation risks recede appreciably during Q3 FY2019,” said the agency.

The agency observed that this should help the Government of India (GoI) to avail a higher net amount from the National Small Savings Fund (NSSF), compared to its target of Rs. 1 lakh crore in FY2019.

“This may result in the GoI announcing a market borrowing programme for H2 FY2019, which may be smaller than what has been expected so far by the markets. This may in turn help to contain Government Security (G-Sec) yields to an extent going forward,” ICRA said in a note.

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