Synopsis–The central bank has been struggling to keep bond yields from spiking in a year that will witness record government borrowing, with North Block expanding its balance sheet to compensate for the lack of immediate private sector investments. However, relatively high small savings rates, considered politically sensitive, could make Mint Street’s task of lowering broader debt costs difficult.
Banks and the industry regulator favour a cut in small savings rates to help lower the cost of borrowing in the broader economy, which experts believe would need both fiscal and monetary support to return to a trajectory of sustainable growth.
The central bank has been struggling to keep bond yields from spiking in a year that will witness record government borrowing, with North Block expanding its balance sheet to compensate for the lack of immediate private sector investments.
However, relatively high small savings rates, considered politically sensitive, could make Mint Street’s task of lowering broader debt costs difficult.
“Small savings rates are quite likely to be cut next month, in sync with the broader rate trajectory, as the state assembly elections are now behind us,” said Madan Sabnavis, chief economist at CARE Ratings. “This would avoid any possible anomalies in the interest rate markets, which, in turn, could hurt federal or corporate funding costs.”
The Centre offers returns in the range of 4-7.6% across various small savings schemes — Sukanya Samriddhi, National Savings Certificate (NSC), Public Provident Fund (PPF), Monthly Income Account and Senior Citizen Savings Schemes.
These relatively high-yielding and guaranteed investment options are popular, especially with the middle- and lower-income households. The finance ministry cut small savings rates across tenors by 50-100 basis points on March 31, only to reverse its decision the next day.
‘Accommodative Monetary Conditions’
Four states and one Union Territory were going to polls then. With the election results announced on May 2, industry experts believe North Block will now take a decision on the rates. The next rate review is due on June 30.
At present, a one-year term deposit plan at the State Bank of India offers 5%, compared with 7.6% for Sukanya Samriddhi, 7.1 % for PPF, 6.8% for NSC and 6.9% for Kisan Vikas Patra.
Since August 2019, the Reserve Bank of India (RBI) has slashed repo rates by 175 basis points to 4%, while returns on small savings plans have been reduced by 80-110 basis points. One basis point is equal to 0.01 percentage point.
“We reckon the RBI will continue to remain proactive and make sure that monetary conditions stay accommodative, which should be backed by small savings rate reduction,” said Rahul Bajoria, chief economist at Barclays India. “If they remain elevated, it will cause a distortion in the rate markets. RBI has been reasonably successful in keeping a lid on rates, especially for longer duration bonds.”
The central bank has focused on keeping the benchmark bond rate around or below the 6% mark.
Separately, a reduction in small savings rates should also make it easier for banks to garner deposits. Banks expanded their deposit base marginally to Rs 151.34 lakh crore as on April 23.
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