Sharp cut in small savings rates ill-timed (The wrong move that will hit crores, during pandemics)

Excellent study material for all civil services aspirants - begin learning - Kar ke dikhayenge!

 Sharp cut in small savings rates ill-timed (The wrong move that will hit crores, during pandemics)

---

Read more on - Polity | Economy | Schemes | S&T | Environment

---

• Govt goes for the jugular: In one shot, the savings rate on small savings deposits was slashed by 70-140 bps (basis points). That will hurt the rural and semi-urban depositors the most.
• Why cut: There are two reasons -

1. The RBI cut the repo rate sharply, by 0.75 %
2. Small savings had not been touched for a long time now

• Argument: If RBI wants to help fight the pandemic, it has lowered the repo rate. So other rates must come down, like the savings rate, so that lending rates can reduce. (Lending rate – Deposit rate = Earnings of a Bank)

1. This logic applied today hurts the small savers as inflation is above the 6 % mark
2. Real returns on savings have turned negative (one year term deposit gives 5.9 - 6.5%)
3. Commodity supplies are constrained, so prices are likely to rise/rising

• Scale of the issue: Small savings are Rs.10 trillion, and 68% are in deposits. Bank deposits are Rs.133 trillion, so small savings are 5% of it.

1. So the argument that banks are not able to transmit repo rate cuts as they have to maintain small savings deposit rate, is flawed (only 5%)
2. This low per cent is due to rural and semi-urban appeal of small savings schemes, via post offices
3. Senior citizen scheme also gives higher rates (7.4%) but its only Rs.68000 crore
4. So regular bank deposits are different from small savings
5. Deposits do not move in large volumes from banks to post offices even if rates differ greatly. (so that worry is wrong)

• So deposit rates to go down: Banks will surely reduce their deposit rates, and formula-based MCLR too will reduce. But growth in bank deposits too may reduce.

1. In 2018-19, the RBI had to go in for OMO purchase of Rs.3 trillion due to slow bank deposit growth.
2. Why that slowdown? Households had gone in for mutual funds and stocks.
3. In 2020, deposits will shrink faster as incomes are hit hard due to companies slowing down. 20-25% population depends on savings for sustenance.

• Small savings used by govt.: In the period 2016-17 to 2019-20, the GoI has borrowed heavily from small savings - Rs.67000 cr in 2016-17 and Rs.2,40,000 cr in 2019-20. So, of the Rs.7.8 trillion borrowing in 2020-21, this is 30 % support coming from small savings. So if these go down, market borrowing go up, so yields will go up.
• Summary: Deep rate cuts on small savings in a single shot was a bad decision.
• From many perspectives, the sharp rate cut on small savings deposits was a wrong financial decision in 2020.

Read more on - Polity | Economy | Schemes | S&T | Environment

Join UPSC Self Prep course | Online Course (PT Gurukul)  | Covid Special Course | Join PT courses

* Content sourced from free internet sources (publications, PIB site, international sites, etc.). Take your own subscriptions. Copyrights acknowledged.