Small Savings Rate Cut - Acuité Ratings & Research Limited

Suman Chowdhury, President - Ratings at Acuité Ratings & Research on small savings rate cut:

"The Government has finally decided to bite the bullet and cut the interest rate on the small savings schemes substantially for the first time to the extent of 70-140 bps. While this has historically been a sensitive matter and will impact the incomes of senior citizens in the mid-income group in particular, this will remove a structural constraint in the transmission of rate cuts in the domestic monetary system. The differential on a 5 year bank and a small savings scheme deposit was almost to the extent of 2.0% which will now drop to even less than 1.0%. This will enable the banks to reduce the interest rates on the term deposits and possibly even savings deposits further and thereby, help them to pass on the benefits to both existing and new borrowers. The attempt to align the deposit rates of bank and small savings can further have two longer term implications. This can facilitate a gradual movement of a part of household savings from small savings to alternative avenues namely banks, insurance companies and mutual funds. At the same time, this may reduce the availability of funds through National Small Savings Fund (NSSF) that typically is utilised to finance a part of the fiscal deficit and make the government more dependent on direct market borrowings."

Source : Equity Bulls

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