<div><em>Small savings rates may not be going down in a hurry. Make hay while the sun shines, says <strong>Sunil Dhawan</strong></em></div><div> </div><div>It’s almost ten days since RBI had cut the repo rate by 0.5 per cent but the lending rates in the economy doesn’t seem to come down. From 7.25 per cent, the repo rate stands at 6.75 per cent now. In September 2014, it stood at 8 per cent. Overall, the repo rate has been reduced by 1.25 per cent over the last 12 months. However, the banks have reduced their base rate by around 0.30 per cent.</div><div> </div><div>With reduced repo rate, banks can now borrow at low cost from RBI. But, that’s not the entire story. For further lowering of base rate, banks need to bring cost of deposits lower. Liability towards existing deposits is high as such deposits have been contracted earlier.</div><div>So, what is holding them back from reducing deposit rates on fresh funds? It’s the post office small savings interest rates probably. Even finance ministry officials have hinted upon the lowering of small savings rates. </div><div> </div><div>Lowering of interest rates understandably are favoured by corporates, markets and anybody who is a borrower. The biggest casualty are the fixed income investors especially the retired citizens who rely on fixed income for their regular income needs. Presently, banks are offering interest rates around 7.75 per cent or even lower across most tenures on the bank fixed deposits. </div><div> </div><div><img alt="" src="http://bw-image.s3.amazonaws.com/SMALL-saving-lrg.jpg" style="width: 621px; height: 359px; margin: 1px;"><br><br><br>Let’s now see how and what governs small savings rates. Unlike in the past, when government fixed the rates, nowadays, rates of PO instruments are linked to G-sec rates and are re-set each year on 1st April as per the recommendation of the Shyamala Gopinath committee report. In addition to benchmarking the rates, there are provisions in the report to take care of volatility risk if the differential between policy rate and small savings rate gets stretched. </div><div> </div><div>Whether the government can intervene before 1st April to align the rates with market realities will be interesting to see, keeping in mind the political fallout in reducing small savings rates.</div><div> </div><div> </div><div> </div>
_20241008215120_original_image_25.webp)
