InvestorQ : Do you see the rates of interest on small savings eventually being cut after the elections or do you see the rates remaining the same?
diksha shah made post

Do you see the rates of interest on small savings eventually being cut after the elections or do you see the rates remaining the same?

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shrinidhi Rajan answered.
5 months ago
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It is hard to say when it will happen but one thing is certain that it is a decision that is long overdue. The government just cannot afford to pay such high rates on small savings despite market interest rates having come down. On top of that the government also loses tax revenues due to the Section 80C benefits that these small savings investments proffer to the investors. Clearly, that is not sustainable.

Political sensitivities are a reality and government has to live with them, the government is right that such rates cannot be sustained. Paying over 7% on PPF, when bank FDs pay a little over 5% is not sustainable. Let us also not forget that repo rates have fallen sharply in India since 2015 but that is hardly reflected in the small savings rates, which continue to be elevated. These small savings are costing the government a bomb.

Cut in small savings rate may reduce the yields but it is high time for cuts to be done at the earliest. At this point, the government must go ahead with rate cuts because the decision to cut small savings rates has a number of merits. Firstly, it reduces the debt servicing burden of the government especially since there is more than $300 billion of deposits in small savings that is outstanding at this point of time.

Secondly, banks get further incentive to cut rates on loans and ensure better transmission of rate cuts. The small savings will not directly compete with and cannibalize the bank deposits, which was the fear. Lastly, small savings with artificially high rates and tax benefits have been distorting the yield curve as well as the debt markets for far too long. It is time for course correction and government may go for rate cuts after the elections.

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