An unkind cut for India’s savers

| Updated on April 01, 2020 Published on April 01, 2020

It’s inexplicable why the Centre withheld small savings rate cuts for long, only to slash them now

After making barely any changes to its interest rates on small savings schemes when India’s policy rates dwindled by 135 basis points in the 12-month period to February 2020, the government seems to have been galvanised into action by the MPC’s recent rate cut. While announcing new interest rates for the April 1-June 30 quarter, the Centre has taken a hatchet to small savings, pruning their rates far more sharply than warranted by the recent MPC action. One- to three-year post office time deposits will now offer an interest rate of just 5.5 per cent per annum — 140 basis points lower than the preceding quarter — the NSC will offer 6.8 per cent — 110 basis points less — the Senior Citizen’s Savings Scheme will pay just 7.4 per cent, a 120 basis-point cut, and the Monthly Income Account will pay 6.6 per cent, which is a 100 basis-point reduction. While reductions in small savings rates were inevitable, given that they are supposedly pegged to market yields, it is difficult to explain why the Centre withheld adjustments for so long, only to bunch them up to a particularly precarious time for savers.

The steep rate cuts are badly timed on three counts. One, they will enforce belt-tightening on small savers and retirees relying on post office schemes for supplementary income at a time when they’re likely to be facing a crying need for higher cash flows owing to the Covid-19 crisis. Two, both the Centre and the States are highly likely to breach their fiscal deficit targets in the current year and the National Small Savings Fund (NSSF), which houses inflows from post office schemes, would have come in handy to supplement their market borrowings and bridge the fiscal gap. Now with the steep cuts likely to discourage savers, inflows into the NSSF are likely to dwindle. Though the banking lobby is fond of arguing that small savings schemes compete with bank deposits for household savings and that high rates on these schemes impede rate transmission, the argument stands on thin ground in the current context. With deposit growth outpacing credit growth in recent months, banks have been flush with liquidity in recent months and had already slashed their deposit rates to levels well below the small savings rates. With individual contributions to the popular post office schemes subject to quantitative limits, retail savers have no option but to turn to banks once they exhaust these limits.

Overall, while it is desirable in the interests of transmission to not allow the post office schemes to turn into islands of high returns that are unaffected by market rates, the ad-hocism that has crept into rate-setting in recent times inflicts unnecessary volatility and uncertainty on the most vulnerable section of India’s savers. The Centre must restore the transparent pegs between small savings rates and underlying gilt yields and disclose these numbers during its quarterly resets.

Published on April 01, 2020

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