The joke govt played on Fool’s Day

People woke up to a rude joke on April Fool’s Day. The government announced a steep cut in interest rates on Small Savings Schemes (SSS) for the first quarter of FY 2021-22, starting from April 1, through an Office Memorandum (OM) issued the previous day by the Union Finance Ministry’s Budget Division. This was followed by another hastily issued OM on April 1 on the same subject which said, “In suppression (or did they mean supersession?) of the OM…dated 31.03.2021 on the above subject…the interest rates on small savings schemes will remain unchanged.”

The government was in damage control mode. The Finance Minister was quick to tweet early in the morning that orders issued by “oversight” would be withdrawn. Small-savers and pensioners were left wondering which of the two – the slash or the rollback -- was a joke. What crossed the common man’s mind was, why would the government take such a hasty step at a time when elections were underway in five states? It had also come at a time when people were reeling under a series of hikes in petrol and diesel prices. Elsewhere, on the same day, HDFC Ltd had increased interest rates on fixed deposits maturing between 33 to 99 months by 25 basis points!

Back to the contents of the controversial circular slashing interest rates on SSS. The downward revision in interest rates was across all schemes and ranged from 40 to 110 basis points. The smallest cut was for three-year deposits, for which the interest rate was cut from 5.5% to 5.1%, while the steepest cut was for one-year deposits, slashed from 5.5% to 4.4%. Senior citizens who had just got the first dose of vaccine got a rude shock with the interest rate on the senior citizen savings scheme cut from 7.4% to 6.5%. It is common knowledge that senior citizens depend overwhelmingly on these schemes to park their savings in and to meet their expenses as most banks are offering only around 6% on fixed deposits.

The middle class and senior citizens have lost faith in the banking system after a spate of bank failures. The cut was equally cruel under Sukanya Samriddhi Yojana, with the interest rate being cut from 7.6% to 6.9%. Even those working in the formal sector were not spared. The rate on PPF was cut by 70 basis points from 7.1% to 6.4%. Interest rates on SSS have been reset on a quarterly basis since 2016. They are benchmarked to the yield on 10-year g-secs (government securities), which has dropped from 6.8% a year ago to 6.17% now.

Small savings are an important source for financing the government’s deficit, and the government has already raised around Rs 4.5 lakh crore through it in FY 20-21. The government has many sources of borrowings, external and internal, such as g-secs, treasury bills or small savings. The government knows that lenders or investors in small saving schemes are mainly from the middle class and senior citizens. It can claim that there will be a government guarantee in these schemes and there is no default risk and hence these investments are safe for the common man. That said, the government cannot be so ruthless as a corporate borrower for whom the lower the interest rates, the better it will be for the corporate’s bottom line. But imagine borrowing at 5.8% on a National Savings Certificate (NSC) from small savers, which is less than the benchmark rate of 6.17% on a 10-year g-sec! This is preposterous. Something is amiss. The government has to take care of small savers, more so when there are no social security measures in place.

The reduction in interest rates was sought to be done at a time when core inflation is on the rise. It had increased to 5.6% in February, up from 5.3% in January. Moody's Analytics said in a report recently that India's inflation is "uncomfortably high," thanks to the increase in fuel and food prices. The rise in international fuel prices from $30 per barrel a year ago to $65 per barrel now is one of the reasons for the rise in fuel prices. Incidentally, petrol price had touched Rs100 per litre recently in Rajasthan. Though inflation has been subdued in most countries in Asia, it has been going up in India, making it difficult for the Reserve Bank of India’s Monetary Policy Committee (MPC) to recommend cutting rates when it meets in a few days. Retail inflation, on which MPC relies to change the policy rates, rose to 5% in February, from 4.1% in January.

With inflation targeting being the policy in place and the MPC mandated to keep inflation at around 4%, it is high time government came out with a mechanism to insulate small savers from fluctuations in interest rates.

(The writer is a former banker and currently teaches at Manipal Academy of Banking, Bengaluru)