The government's move to slash interest rates on popular small savings schemes like public provident fund (PPF) and senior citizen savings scheme has disappointed many investors. But analysts say that the move will benefit the economy in the long run.
Here Are The Key Points
1) Analysts say that the big cut in small savings rate is an important signal from the government to the Reserve Bank of India to reduce rates. The RBI's next policy review is scheduled for April 5.
2) Banks had earlier said they could not cut their retail deposit and lending rates substantially when the small savings schemes offered higher rates. That slowed the process of banks passing through the RBI rate cuts to boost economic growth. Despite the RBI lowering rates by 125 basis points last year, banks have passed on just 60-70 basis points in lending rate cut.
3) Commenting on the small savings rate cut, Finance Minister Arun Jaitley said the country has to move towards lower interest rates to make the economy more efficient. "To make economy more efficient, the country has to move towards lower interest rates in both (lending and deposit rates),"he said.
4) "It is a little unfortunate from the perspective of middle class as they will earn less from deposits at a time when the service tax is going up. But the economy will benefit as a whole from lower rates. RBI will be forced to consider significant cut in rates," said G Chokkalingam, founder of Equinomics Research & Advisory. However, RBI will keep a close watch on the monsoon forecast before making significant cut in its repo rate, he said. The weather department is expected to release its monsoon forecast in the last week of April.
5) "The middle class has to sacrifice their interest for the larger sake of Indian economy. Banks will cut their deposit rates aggressively," said banking analyst Hemindra Hazari. He expects banks to significantly cut rates on 1-year fixed deposits, "where most of the deposits are".
6) Mr Hazari however does not expect banks to reduce lending rates as aggressively because of the pressure on their bottomlines due to rising bad loans.
7) Dr. Ajit Ranade, senior president and chief economist at Aditya Birla Group, said that despite the cut in small savings rates investors are earning "reasonable" rate on their investment on an inflation-adjusted basis. "In the past, when inflation was 10-11 per cent and postal deposit rate was 9.50 per cent the depositor was getting a negative return," he said.
8) "If small savings rates are kept very high, then it leads to a high cost economy," Mr Ranade says. Lower small savings rates leaves the room open for reduction in lending rates and improvement in credit growth, thus boosting economic growth, he added.
9) Importantly, the government will be a big beneficiary of a reduction in interest rates, say analysts. A reduction in interest rate for the government, which borrows Rs 5 lakh crore annually, could lead to big savings and this money could be used for additional spending on infrastructure and other social sectors, Mr Ranade said.
10) Future RBI rate cuts and an overall lower interest regime will bring down the bond yields, say experts. A fall in yields, which move inversely to bond prices, will increase the prices of government bonds. Banks, which hold significant proportion of government bonds in their portfolio, would be a beneficiary of lowering bond yields, said VG Kannan, MD of State Bank of India. Lower interest rates in the overall financial system will help banks cut their lending rates but with a lag because banks still pay higher interest on older fixed deposits, he added. Banking stocks and bonds rallied on Monday on hopes of bigger rate cut from Reserve Bank of India.
Essential Business Intelligence, Continuous LIVE TV, Sharp Market Insights, Practical Personal Finance Advice and Latest Stories — On NDTV Profit.
