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
