In a welcome move to realign the returns to small savers with prevailing market interest rates, the Centre has announced increases of 30-50 basis points in rates payable on its post office savings schemes for the upcoming October-December quarter. Pegging up the rates on short-term deposits by 30 bps, it has reserved higher increases of 40 bps for special schemes such as the Post Office Monthly Income Scheme, Sukanya Samridhhi, Kisan Vikas Patra, Public Provident Fund and National Savings Certificates, with a 50 bps increase on the Senior Citizen Savings Scheme (SCSS). While this may mean increased borrowing costs for the Centre, it sends out the right signals to the market as well as investors engaged in reallocating their financial savings.
Indian banks have always been tardy in passing on market interest rate increases to their depositors, while transmitting them promptly to their borrowers. Bank deposit rates have climbed by just 50 bps in the past year while government security yields have jumped by 100-140 bps. With post office term deposits now set to offer 6.9 to 7.8 per cent for one- to five-year tenors, leading banks may be nudged to raise their low deposit rates of 6.25-7.25 per cent. It is good to see the Centre not kowtowing to the bank lobby in setting rates for post office schemes. Higher rates on the sovereign-guaranteed post office schemes may also discourage small savers from hoarding cash or taking uninformed bets on equity or hybrid mutual funds, without a full understanding of their risks. The latest RBI Annual Report showed that in FY18, household savers halved their incremental deposits with banks, while doubling their holdings of hard currency and raising their equity and mutual fund bets fourfold. While financialisation of savings is certainly welcome in the Indian context, it is worrisome that the retail fancy for market products should surge only in raging bull markets. The new rate of 8.7 per cent on the SCSS, though at a premium to markets, makes up for the lack of a social security net for retirees.
Given the above positives though, it is a moot point why the government took so long to peg up the rates on post office schemes. Though these rates are ostensibly pegged to prevailing G-Sec yields, based on the recommendations of the Shyamala Gopinath committee since 2016, the Centre’s rate actions on these schemes have been barely in sync with market trends. Though the G-Sec yield has been on an upward march since September 2017, rates on small savings schemes were trimmed in January-March 2018 and held without change for the previous two quarters. Ensuring that small savings rates closely track gilt yields will not just mean more predictable returns for small savers; it will also preclude ad-hoc rate-setting which opens the doors to pre-election populism.