InvestorQ : What do you make of the government decision to cut the small savings rates? Do you see that as a good move?
Dhwani Mehta made post

What do you make of the government decision to cut the small savings rates? Do you see that as a good move?

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Mitali Bhutta answered.
5 months ago
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The government moved in quickly to cut rates on all the small savings products and with equal alacrity withdrew the circular to maintain status quo on rates. It looks like a move to void any negative press ahead of important elections in Tamil Nadu, West Bengal and Kerala. The rate cuts were almost done across the board and here are some classic instances of the extent to which the rates were slashed.

The rates on the highly popular public provident fund or PPF was brought down sharply from 7.1% to 6.2%. In addition, rates on 1-year term deposits were cut by 110 basis points from 5.5% to 4.4%. Even the rates on the Senior Citizens Savings Scheme or SCSS were cut from 7.4% to 6.5%, which is likely to impact retirement flows negatively. Also, the rates of interest on Sukanya Samriddhi for the girl child were cut from 7.6% to 6.9%.

This move was expected to sharply bring down the small savings rates to more competitive levels driven by market realities. Many of them are still attractive if you add the impact of the tax breaks that these investments also get. The rates on the highly popular National Savings Certificates or NSC and Kissan Vikas Patra or KVP were also cut by 90 bps and 70 bps respectively. The cuts would have reduced the distortions in the debt market.

However, less than 24 hours after the original announcement, the government decided to do an about-turn and withdraw the circular. Clearly, they were not too confident of how the senior citizens of India would have reacted. It remains to be seen if this cut comes after the election season. One thing is clear that the current rates of interest on small savings are unsustainable and the rate cut has to come sooner rather than later.

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