Updated: January 28, 2016 12:00:44 am
Even as RBI Governor Raghuram Rajan is set to present his next bi-monthly monetary policy review early next week, there is increased focus on what is to be done with the interest rates on small savings instruments like the public provident fund (PPF), the national saving certificate or the new Sukanya Samriddhi Account Scheme (SSAS). Currently, there’s a significant gap between the rates paid on these — ranging from 8.7 per cent for PPF and 9.2 per cent for SSAS — and the 7-7.5 per cent banks give on deposits or the 7.8 per cent yields on 10-year government bonds. The economic case to align the administered rates on small savings with the rates prevailing in the market is obvious. Such a gap essentially incentivises people to put their money in the small savings instruments, while making it difficult for banks to reduce deposit rates and, in turn, lower lending rates that are much needed in the current investment-starved economic environment.
Over the last year, the RBI has cut its policy rates by 125 basis points, whereas banks have on average reduced their lending rates by just half of that. Economists are not wrong in pointing out that the high administered rates for small savings — in relation to both market rates and CPI inflation — act as effective impediments in the “transmission” of the RBI’s monetary policy signals. To that extent, any further repo rate cuts — even assuming it happens on February 2 — will have only a limited impact on what companies and individuals would pay for their loans from banks. One could also very well argue that the overall gains to the economy from lower interest rates will far outweigh benefits to small savings deposit holders, who are today receiving real interest rates of 3 per cent after adjusting for inflation. They will continue receiving inflation-beating returns even if rates on PPF deposits are cut by 1 per cent. But selling this politically is another thing.
What can be done? Ideally, the government should follow the report of the Shyamala Gopinath committee that, in 2011, had suggested fixing small savings rates based on “a positive spread of 25 basis points, vis-a-vis government securities of similar maturities…” One way to make it politically more palatable could be to retain the current rates only for deposits below a certain limit. But ultimately, this is a political call the government cannot delay too long. It’s unlikely to encounter much resistance here from states, which are less reliant on small savings collections following the Centre’s decision to devolve an increased share of its tax revenues.
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