The Centre has done well to preserve the status quo on small savings schemes in a time of rising inflation and pressure on incomes. Interest rates on post office schemes favoured by retail savers, senior citizens and monthly income seekers have been left unchanged for the fifth consecutive quarter. While purists may argue that it is anomalous for sovereign-backed instruments to offer higher rates than bank deposits, there was limited logic for trimming these rates now. Amidst the global debate on resurgent inflation, India’s CPI and WPI prints have surprised on the upside and yields on the 5-year government security to which small savings rates are supposed to be pegged, have risen about 25 basis points to 5.75 per cent, making it imperative to protect real returns for savers.
Traditionally, India’s net household savings have been positive, in the process funding the negative savings of the government sector (the Centre, States and public sector) without creating any serious macroeconomic imbalance, post 1991. However, gross household savings (a trend level of about 15 per cent of GDP) constitutes about half the total savings now, while this proportion was closer to two thirds about a decade back. Given the need to boost growth and physical and social infrastructure, it is crucial that net household savings pick up from the current level of about 10 per cent of GDP. Debt-financed growth will lead to rising market interest rates and currency volatility. The RBI cannot sustain its unconventional monetary policies to keep rates in check for borrowers for all time to come; the interest rate must reflect the current account deficit or savings-investment gap.
A sustained regime of real negative interest rates via a suppressed yield curve will spur disintermediation into physical assets or in risky investments, creating an asset bubble that has been associated with over two decades of loose monetary policy worldwide. Former RBI Governor Raghuram Rajan had mooted a real interest rate of 1.5-2 per cent as the benchmark (calculated as the difference between the one-year G-sec yield and retail inflation). The present one-year G-Sec yield converges with the repo rate of 4 per cent, whereas it was about 40-50 basis points higher a few years ago. At present a real interest rate of minus 2 per cent thus calculated, which has been around for a year, does not augur well for savers. While in the short term, they may continue to save more to offset the low returns, or consume more, net savings in the medium term will suffer. Monetary Policy Committee member Mridul Saggar has observed that “not all savers may necessarily be worse off when central banks push down the interest rates”, which is perhaps true only in the short run. Without being persuaded by bond vigilantes who overreact to accommodative policies, it is important to recognise that interest rates must take savers’ interests into account.