Rate cut: Government to take a fresh look at small savings interest

The government has decided to review the small savings rates, which remain sticky at 8.4-8.5%, limiting banks' ability to lower deposit rates and slowing down the transmission of Reserve Bank of India's softer monetary policy decisions.

"It has been decided that with regard to the transmission of the rates, the government will undertake a review of the small savings rate also," economic affairs secretary Shaktikanta Das said."Small savings is a decision the government has taken in response to the policy rate announced by the RBI," he said.

The decision to cut small savings rates is a tricky one since no ruling party wishes to become unpopular to the vote bank they depend upon. However, lowering of the small savings rates is directly linked to the rates at which companies borrow from banks. "There is no time limit. We will do it in due course," finance minister Arun Jaitley said. RBI governorRaghuram Rajan surprised all by a 50 basis points repo rate reduction but doubts prevail on how banks across the spectrum transmit the easy policy rate into lowering of lending rates unless they manage to soften deposit rates. RBI has reduced repo rates by 125 bps since January, yet the transmission of the rate cuts into the real economy has been relatively weak.

Rajan indicated that there would be a shift in focus from policy rates to greater transmission of these rates. Banks reduced deposit rates aggressively over the last three quarters with some lowering term deposit rates by 50-75 bps but matching cuts in lending rates come with a lag. But they have time and again whined that high interest rates on small savings such as public provident fund or post office monthly income schemes are stopping them from lowering deposit rates beyond a point and this inability prevents them from making loans cheaper.

Senior citizens get 9.3% from post offices, 100-130 bps higher than what they get from most state-run banks. "A major part of small savings comes from the risk averse segments and for them it is the means of subsistence. It (lowering small savings rate) is easier said than done," said India Ratings managing director Ananda Bhowmik. "So, the transmission of policy rate will continue to be an issue. Historically, monetary transmission remains limited to 25-40% of policy rate cuts. It may increase a bit but not beyond 50% due to the structural bottlenecks," he said. The country's largest bank, State Bank of India, cut deposit rates by 25 bps across maturities effective from October 5.

Its medium-term deposit rate is 7.75% at present while small savers enjoy 8.4% rate for deposits below five years from post offices and for the popular monthly income scheme. Public provident fund offers 8.7% rate a year.

Source:-The Economic Times