In response to the RBI’s bigger-than-expected 50 basis points policy rate cut, the Centre moved swiftly to announce that it would review the small savings rates, encouraging bankers to cut their lending rates faster. As for corporates, the lower interest rates will benefit them hugely.
Soon after the announcement, Finance Minister Arun Jaitley said that the government now looks forward to the “transmission” of the policy rate cuts to the rest of the economy. It will work to facilitate this transmission, including by reviewing the framework of small savings, Jaitley said.
The announcement to review small savings rates should comfort bankers as they may not have to grapple with flight of deposits to small savings schemes if they chose to cut their deposit rates.
Currently, most one-year deposit schemes of public sector banks fetch 8.25-8.5 per cent. The average return of most small savings schemes is around 8.5 per cent. For cutting their lending rates, banks want to cut their deposit rates so as to preserve margins.
However, their apprehension is that cutting deposit rates would lead to a flight of deposits to small savings schemes. “Don’t bind it in a time limit. We will do it in due course,” Jaitley told newspersons here when asked if there was a timeline by when small savings rates would be reduced.
Economic Affairs Secretary Shaktikanta Das said the government would undertake a review of the small savings framework, which meant that every aspect would be reviewed.
Chief Economic Advisor Arvind Subramanian said that the government would undertake the review in the broader context to see what the rates are and who was benefiting from these rates.
“There is going to be a proper review of that. It is too early to pre-judge that exercise,” Subramanian said, adding that the government will review the GDP growth target for the current fiscal after the figures of second quarter are available.
Fiscal deficit target Jaitley also said that the government was committed to meeting its fiscal deficit target to consolidate the gains achieved in reducing inflation. The RBI’s monetary policy actions signal that inflationary pressures have moderated significantly and are within the apex bank’s comfort zone.
“It also signals that the RBI is able to provide policy support to the real economy and help its recovery. The RBI rate cut, combined with the actions taken and planned by the government, will help boost confidence and investment, and realise the economy’s medium term potential growth rate,” Jaitley said.