A recent move by the government in Budget 2020 may make it difficult for them to bring Post Office small savings schemes interest rate down in a hurry or bring any drastic reduction in the interest rates.
In spite of holding the repo rate constant, the Reserve Bank of India (RBI) in its latest monetary policy meeting had indicated that there is still space for the interest rates to come down. In the calendar year 2019, RBI had cut the repo rate by 135 basis points but the recent inflation numbers have probably halted the momentum. With RBI taking other measures to bring down the cost of funds for banks, the fixed deposit interest rate is already around 6 per cent-1 to 10 years tenure-in most banks. On the other hand, post office small savings schemes are a popular investment option for savers as they continue to offer better and higher rates than bank FDs.
According to the recent release from the Economic Research Department of State Bank of India, " It seems that a large portion of food subsidy bill is getting shifted to next year to be funded through NSSF. Going forward, the increased reliance on small savings, in turn, would make it difficult for the Government to cut small savings interest rate and thus bank deposit rates might be impacted."
All deposits received under National Saving Schemes such as PPF, NSC etc are credited to the National Small Saving Fund (NSSF) and withdrawals and payments are made from it as and when required. Funds are deployed in designated government securities and also lending to agencies fully owned by the Central Government is made from NSSF.
As per the research report, the Government has reduced the food subsidy bill significantly by Rs 75,532 crore in FY20 RE when compared to BE. This is assumed to be taken off the budget and supposed to be financed from small savings. Interestingly, when the investment of NSSF funds is looked at it is observed that a significant amount in FY21 is allocated to Food Corporation of India.
In FY20, around 76.1 per cent of the additional investment of the fund in public agencies went to FCI. This has increased to 96.5 per cent in FY21. Gross amount of Rs 1.36 lakh crore is budgeted to be invested in FCI and considering the repayments of Rs 68,400 crore, the net amount of investment in FCI stands at Rs 68,200 crore. It seems that a large portion of food subsidy bill is getting shifted to next year to be funded through NSSF.
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Therefore, the Economic Research Department of State Bank of India feels that going forward, it could be difficult for the Government to cut small savings interest rate which could also have an impact on the bank fixed deposit rates. The banks may not be in a position to cut FD rates drastically giving the investors with no option but to move towards small savings. A parallel cut in PO savings schemes may be required to bring the overall interest rates lower in the economy.
The small savings interest rate is set by the government at that start of each quarter of the financial year. For the quarter January to March 2020, the rates were kept constant and even in the previous quarter of October to December 2019, there was no change in small savings interest rates. The last time the small savings interest rate was revised downwards was in July to September 2019 quarter.
Currently, on the time deposits for 1-2-3 years, the interest rate is 6.9 per cent, while on 5-year deposit it is 7.7 per cent. On the monthly income schemes, the interest rate is 7.6 per cent, while both on NSC and PPF it is 7.9 per cent. So, till the time the government doesn't reduce rates, the investors may continue to enjoy higher rates on small savings schemes.