Leave Small Savings Rate Alone! - Moneylife

Leave Small Savings Rate Alone! - Moneylife


This refers to the response "Leave Small Savings Rates Alone"

There are several inter-related issues affecting interest rates on deposits. When RBI cuts base rate, banks quickly act by passing on the impact of the rate cut by reducing deposit rates, though the hurry is not that evident in reducing lending rates at the ground level, as banks know how to maintain the level of interest income despite changes in prime lending rates. Going by the finance ministry announcement about the ‘review’ of rates on PPF and Small Savings, which according to the ministry, stands in the way of banks in reducing interest rates, the reduction in interest rates on PPF and Small Savings is imminent.

Those who are responsible to pay interest have every right to review the rates and bring it down to their advantage. But, those who have invested their savings with a long term perspective considering the security and liquidity concerns, should not be given a shock, just because there is a temporary change in the movement of wholesale prices.

Some analysts console savers that return on investments have become ‘positive’ these days with inflation getting tamed. May be true. But one is yet to come across a single household budget, which has come down because prices have come down in the recent past.

At present, interest paid by bigger banks on long term FDs is less than 8 per cent per annum, post office term deposits earn between 8.40(3 year Term Deposits)  and 8.80 per cent (10 year National Savings Certificates) and Public Provident Fund Scheme fetches 8.70 per cent per annum. A revision of these rates downward will move savers from safe and secure investments to other riskier avenues which again will involve a social cost to the nation in the long run.

It is also worth pondering over whether government’s own market borrowings and resources mobilisation will be sustainable, if the rates are linked to RBI’s repo rates or deposit rates of banks and if SLR of banks and funds with EPFO, LIC etc  no longer remain a captive source.

There is a social cost, if savers and borrowers are driven away from the mainstream financial system which is well regulated. Savers will start investing in unproductive, unsafe and illiquid assets including deposits with spurious players who offer high interest rates. Borrowers will try to trespass into territories where short term credit may come at a lesser cost and get into trouble when unexpected events interrupt prompt repayment. While RBI should be allowed to decide policy rates, government should manage rates on PPF and small savings keeping in view the long term nature of such savings instruments which are surviving on the trust reposed by savers who are dependent on the income from their investment for survival. Linking the rate of return on such investments with short-term fluctuations in ‘inflation’ can be disastrous.

M G Warrier


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