0.2662
iasparliament Logo
iasparliament
April 04, 2020
2 months
554
2

Do you think that the recent cut in interest rate of small savings schemes is a severe blow for savers in the country? Comment (200 Words)

Refer - Business Line

Enrich the answer from other sources, if the question demands.

2 comments
Login or Register to Post Comments

IAS Parliament 1 month

KEY POINTS

The recent cut in interest rate of small savings schemes is a severe blow for savers, who continue to be short-changed by policymakers.

Why this reduction now?

·         The business community often pressure the government and the RBI for a reduction of interest on credit, so that their cost of production can come down. And the RBI also advocates lesser interest rate for credit for faster growth of the economy.

·         If policymakers really aimed at setting rates consistent with a recovery, they would need to raise them Whenever the RBI suggests that banks reduce interest on credit, they plead that their cost of funds (deposit) warrant no such reduction and they cannot reduce deposit rates as they have to compete with small savings schemes which offer higher interest.

What can happen now?

·         According to RBI data, small savings schemes accounted for a little over a fifth (20.9 per cent) of all Central government borrowing in FY18, up from 17.2 per cent a year before and 2.4 per cent in FY14.

·         This is the highest contribution from small savings in 19 years.

·         Hence the government will save substantial amount of interest outgo, as the reduction is applicable for existing accounts also.

·         Due to lesser competition from small savings schemes, banks will increase their deposit base. Increase in bank deposit will result in higher Statutory Liquidity Reserve and Cash Reserve Ratio.

·         Higher SLR requirement will make banks invest more in government securities and help the government’s borrowing programme. As no interest is paid on CRR, profit of the RBI will also increase, which will indirectly go to the government.

·         Net financial savings by Indian households dropped to 6.5 per cent of GDP in 2018-19 (FY19) — the lowest in at least eight years. The drop has been fuelled by both a fall in gross financial savings as well as a rise in liabilities, shows the data recently released by the National Statistics Office (NSO). But the policymakers do not seem to bother about this aspect.

 

 

reign4518 2 months

The government announced a steep cut in the interest rates in small saving schemes for the first quarter of the financial year 2020-21.Interest rates on several small saving schemes have been cut by between 70 and 140 basis points.

The latest reduction in the interest rates does not bode well for the fixed income investors,especially for the senior citizens who are dependent on interest as a major source of their income.After observing the inflationary trend in the market from 2010,the purchasing power of the individual should be risen up but its a complete reverse in this Small Savings Scheme scenario.For an investment of 10 Lakh the annual rate of interest is 90000(given the rate of interest is 9% in 2010) now it will come down to 74000(given the rate of interest in 7.4% as per the recent announcement).

The inflation rate in India between 2010 and now is around 95% i.e. the purchasing power of Rs.100 equals Rs.195 today.So,if 90000 being the interest paid in 2010,is to the have the same purchasing power ,it should be equivalent to 175500 ( 90000 * (195/100)) ,So the depositor has the lost the purchasing power to the extent of 1,01,500 which is a huge sum.

As the bond yields are decreased(major factor in deciding the interest rates) and also given the present ongoing Covid 19 crisis,Government has taken this extreme step which affects the individuals especially the senior citizen who invested under Senior Citizens Savings Scheme.

Way Forward :

This may continue in future too,so people should look beyond these traditional savings methods,that does not mean one should go and directly invest in Equity market,one can give a try investing in hybrid mutual funds where they can get better rates.

IAS Parliament 2 months

Good attempt. Keep Writing.

UPSC Prelims 2020

DATEWISE ARCHIVES - CURRENT AFFAIRS

MONTH/YEARWISE ARCHIVES