There were three things pretty much taken for granted during the first three-and-a-half years of the Narendra Modi government: Global crude oil prices at below $60 per barrel, a stable rupee within 65-to-the-dollar levels, and interest rates directionally headed downwards. The $60-per-barrel crude mark was crossed in November 2017, with Brent currently trading close to $80. The rupee has, since the start of this year, slid from under 64 to over 72 against the dollar. And now, we are seeing interest rates also climbing. Yields on 10-year government bonds, which were at 6.6-6.7 per cent a year ago, are today in the 8-8.1 per cent range. The State Bank of India has, since March, raised its one-year MCLR or marginal cost of funds-based lending rate from 7.95 per cent to 8.45 per cent.
It’s not surprising, then, to see the Modi government, too, hiking interest rates on the public provident fund (PPF) and other post office-operated small savings schemes by 0.3-0.4 percentage point for the October-December quarter. This increase had to happen, given that the interest rates under these schemes are, with effect from April 2016, being benchmarked to government security yields of comparable maturities. The rates, which were last reduced by 0.2 percentage points for January-March 2018, ought to have been revised upwards subsequently in line with rising bonds yields. The government probably wanted to avoid that, given the attendant fiscal costs in terms of higher interest outgo. But with total small savings schemes collections falling from Rs 434,175 crore in 2016-17 to a mere Rs 60,915 crore during April-February 2017-18, there was no choice really. If the Modi government did the right thing slashing the PPF interest rate from 8.7 per cent to 7.6 per cent between March 2016 and March 2018, it has done no favour to depositors either by raising the same now to 8 per cent.
But it isn’t just the government. Even businesses and households have to reconcile to the fact that the interest rate cycle has turned. This is linked to global factors. In the last one year, 10-year US Treasury yields have hardened from 2.25 per cent to 3.1 per cent, as against the 1.4 per cent lows of July 2016. That party of ultra-low interest rates, courtesy the monetary stimulus measures unveiled by major central banks in response to the 2008 global financial crisis, is over. A similar artificial situation in India post-demonetisation — when a surge in cash deposits led SBI to lower its one-year MCLR from 8.90 per cent to 7.95 per cent between November 1, 2016 and November 1, 2017 — is also over. Everyone has to readjust to this return to “normal”, which unfortunately comes along with volatile oil and currency movements.