Savings

An Unkind Hike: The Hindu Editorial on Small Economies

With persistently high inflation, small savings rates should have been pegged higher

With persistently high inflation, small savings rates should have been pegged higher

The The government has recently raised yields on a handful of small savings instruments for the current quarter from October to December by 0.1 to 0.3 percentage point. Popular middle class investment avenues such as the Public Provident Fund (PPF) and the National Savings Certificate have been left out. On paper, the yields of these instruments should reset on a market-determined basis, with a spread of 0 to 100 basis points (one basis point equals 0.01%) over the yields of government securities. comparable maturities. That this was not adhered to is obvious even at a quick glance, given the long pause between rate changes. After interest rate hikes this year to curb inflation, government bond yields have soared. This month, the Reserve Bank of India (RBI) said that the interest rates offered on various schemes in the current quarter are 44 to 77 basis points lower than the rates implied by the formula. The PPF, for example, should have gained 7.72% this quarter instead of the current 7.1%. It should be noted that the central bank, which usually releases formula-based small savings rates every month or two, had not specified them from May to September, although it noted in August that the gap between current rates and formula-based rates rates had become “negative for most” plans.

For households struggling with inflation of more than 6% since January, punctuated by a few months of price increases of more than 7%, these meager increases are far from enough to lift morale. Keep in mind this was the first rate change for these schemes in 27 months – after sharp declines of around 0.5 and 1.4 percentage points across all schemes introduced in April 2020. Let political considerations still determine the trajectory of the nest of small savers – the size of the eggs can be gauged by the few recent occasions when rates were changed or rescinded. The last time rates were raised was in January 2019, just before the Lok Sabha elections. In March 2021, the government announced further cuts ranging from 0.4% to 1.1%, but withdrew the decision overnight, citing an “oversight” amid a polling campaign for five states. However, even as a token gesture for voters in future polls, this latest change to modest savings rates does not make a difference. As senior RBI officials warned earlier, negative yields have serious consequences for the economy if households, who are the biggest lenders, stop putting their savings into these fixed income instruments and banks. The next quarter should see a fairer and healthier yield reset to undo the fall in inflation on household savings.