Impact of ‘rate cut’ on savers’ interests
Those who have invested their savings with a long term perspective considering the security and liquidity concerns, should not be given a shock
The major monetary policy announcement made by Reserve Bank of India (RBI) on 29 September 2015 is a reduction in the policy repo rate under the liquidity adjustment facility (LAF) by 50 basis points (bps) to 6.75% from 7.25% with immediate effect. The measure is widely welcomed by finance ministry, banks and industrial circles, among others who include economists of a different school who have all along been criticising RBI Governor Dr Raghuram Rajan for his stance on inflation. 
The impact of the rate cut on economic growth and the mood of international rating agencies and other stakeholders including foreign institutional investors (FIIs) will be analysed and researched by economists and media in the coming days. This article attempts to caution savers that their interests are at stake and perhaps, time has come when they have to be vigilant about the drain on their resources, which get invested in various financial instruments brought out by government, banks and corporates. 
This caution comes from a second reading of the announcement made by finance ministry on the same day RBI held the bi-monthly monetary policy review to the effect that government will review the interest rates on small savings, which ‘banks say, come in the way of lowering interest rates.’ 
Those who are responsible to pay interest have every right to review the rates and bring it down to their advantage. But, those who have invested their savings with a long term perspective considering the security and liquidity concerns, should not be given a shock, just because there is a temporary change in the movement of prices (let us not get into the controversy about wholesale and consumer price index -WPI or CPI here).
Some analysts console savers that return on investments have become ‘positive’ these days with inflation getting tamed. May be true. However, I am unaware of a single household budget, which has come down because prices have come down.

Interest rates

At present, interest paid by bigger banks on long term fixed deposits (FDs) is less than 8% per annum, post office term deposits earn between 8.40% (3-year term deposits) and 8.80% (10 year National Savings Certificates-NSC) and public provident fund (PPF) scheme fetches 8.70% per annum. A revision of these rates downward will move savers from safe and secure investments to other riskier avenues, which again will involve a social cost to the nation in the long run.

Deposit insurance

Here, a word about deposit insurance. The present ceiling of Rs1 lakh for deposit insurance coverage was fixed ages back. As there will definitely be migration of savers to smaller banks, there is a strong case for a review of deposit insurance to increase the amount covered and, if possible bringing more institutions which accept deposits from public, under the umbrella of deposit insurance.

Government borrowings

Even at this stage, when Centre is seriously thinking in terms of managing government borrowings (public debt) by themselves, one doubts whether those who argue for and against are aware that government borrowings (both central and state governments) are dependent on a captive source? It includes, investment by banks (statutory liquidity ratio -SLR), organisations like Life Insurance Corp of India (LIC), Employees’ Provident Fund Organisation (EPFO) and other public sector undertakings which are guided by several legal obligations and ‘moral suasion’.
The Centre will do well to have a look at the possibility of leaving the interest rates on government borrowings to market forces, by increasing the retail investment component in government securities.

Passing on the benefits of rate cut

The present monetary policy review makes the following observation:
“In the bi-monthly policy statement of August, the Reserve Bank indicated that further monetary policy accommodation will be conditioned by the abating of recent inflationary pressures, the full monsoon outturn, possible Federal Reserve actions and greater transmission of its front-loaded past actions. Since then, inflation has dropped to a nine-month low, as projected. Despite the monsoon deficiency and its uneven spatial and temporal distribution, food inflation pressures have been contained by resolute actions by the government to manage supply. The disinflation has been broad-based and inflation excluding food and fuel has also come off its recent peak in June. The Federal Reserve has postponed policy normalisation. Markets have transmitted the Reserve Bank’s past policy actions via commercial paper and corporate bonds, but banks have done so only to a limited extent. The median base lending rates of banks have fallen by only about 30 basis points despite extremely easy liquidity conditions. This is a fraction of the 75 basis points of the policy rate reduction during January-June, even after a passage of eight months since the first rate action by the Reserve Bank. Bank deposit rates have, however, been reduced significantly, suggesting that further transmission is possible.”
Some banks, of course, reduced their cost on resources by reducing deposit rates.
Let us not assume that Dr Rajan conceded a 50bps cut, perceiving that anyway, this cut may not have much impact on any of the economic indicators including inflation till end FY2016. The gesture may put himself in a better position to bargain with FM on several other issues at a better comfort level and also silence the economists who accuse him for going slow on ‘cuts’ for the time being.

Longer intervals for review

At least from Calendar Year 2016, RBI should consider reverting to quarterly schedule for Monetary Policy Review. There are enough fora for RBI to share its mind on policy issues between such reviews and technically, monetary policy measures including revision of base rates need not always coincide with such reviews. Lesser frequency of reviews may reduce scope for external pressures and lobbying also to that extent.
(The writer is a former General Manager, Reserve Bank of India and author of the 2014 book “Banking, Reforms & Corruption: Development Issues in 21st Century India".)



MG Warrier

2 years ago

Copied below is my letter published in The Economic Times today(October 6, 2015):
Social Cost of Low PPF Rate

This refers to reports that the government may link PPF returns to bank deposits and RBI rates. Those who are responsible to pay interest have every right to bring down the rates to their advantage. But those who have invested their savings with a long-term perspective should not be given a shock, just because there is a temporary change in the movement of wholesale prices. Some analysts console savers that returns on investments are now `positive' with inflation getting tamed. May be true. But one is yet to come across a single household budget that has shrunk because prices have come down in the recent past.
A downward revision of the small savings rates will move savers from safe and secure investments to riskier avenues that will involve a social cost to the nation in the long run. Further, will government's own market borrowings and resource mobilisation be sustainable, if the rates are linked to RBI's repo rates or deposit rates of banks, and if the SLR of banks and funds with EPFO, LIC, etc, will no longer remain a captive source?


2 years ago

Only FDR Holders are at loss. No reduction in actual inflation, no increase in genuine borrower. Only Govt saves 1000 Crs on interest payment due to this reduction. Ya certain reduction in EMIs is a welcome feature.


MG Warrier

In Reply to SANJIVA GAUR 2 years ago

This observation oversimplifies the real issue, which is exploitation of savers, who really provide resources to the banks, government and all economic activities. Please also read S S Tarapore's article 'Miles of smiles but problems await'(The Hindu Business Line, October 2). There is a fallacy in linking RBI's base rate with ground level cost of credit. RBI Governor this time, by going for a higher rate cut, in a way has exposed claims of both FM and Industry that the hurdle for growth is RBI's base rate.

Mahesh Khanna

2 years ago

RBI only talks tough on paper but it has no intention to act tough. There has to be an honest motive in being tough.

Brothers Ambani to connect companies in data, telecom platforms
Reliance Communications chairman Anil Ambani on Wednesday said his company will partner with elder brother, Mukesh-controlled Reliance Jio to offer each other's subscribers seamless reciprocal access to three generations of data and voice telephony in the country.
Addressing the company's shareholders here, Anil Ambani also said talks were at advanced stages for acquiring the India operations of Sistema Shyam TeleServices, besides hiving off the passive infrastructure of telecom towers into a separate company.
Welcoming the recent decisions on spectrum sharing and trading, Ambani said it will prove a major enabler in improving telecom coverage, the quality of service and monetisation of investments that have already been made in acquiring this scarce but expensive resource.
He said the strategic partnership between his telecom arm and Reliance Jio will be a "game-changer" and extend to the "next level" of co-operation, as talks were in advanced stages for finalising a nationwide trading and sharing arrangements in the 800MHz-850 MHz band.
Reciprocal pacts will be reached on roaming, he said, adding: "This strategic cooperation and partnership between R-JIO and RCom is a virtual consolidation in the telecom sector. I'm grateful to my elder brother Mukesh bhai for his unstinted support and guidance." 
Reliance Communications, as per a recent Citi Research report, has 9 percent of the cumulative spectrum allotted till date and will create space for Reliance Jio in the 800 MHz band in all major circles and cities.
Earlier, in 2013, Reliance Jio had entered into an agreement with RCOM for sharing its extensive inter-city and intra-city infrastructure of nearly 520,000 km of optic fiber pairs, besides 45,000 towers. The aggregate value of the deal was pegged at Rs.12,000 crore (nearly $6 billion).
Anil Ambani was also gung ho on the towers business.
"There is excellent progress on the strategic process for the creation of India’s first truly independent tower company through stake sale in RCOM’s (Reliance Communication's) tower business. We expect to sign and announce the transaction within the next month or two," he said.
As regards Sistema, he said, the deal is proposed through a stock-swap will prove a high value deal for RCOM, as it will, in extend the validity of spectrum in the 850 MHz band in eight key circles by a "significantly long period of 12 years" -- all the way up to 2033.
"RCOM will play a frontier role in realising the Digital India vision of Prime Minister (Narendra Modi) with capabilities of high-speed broadband on the back of its nationwide fiber network, high quality spectrum assets, and data centre facilities providing unlimited cloud computing power."
He said the prospects for the company were bright on account of world class telecom assets and will translate into a strengthened balance sheet, fast growth with minimal capital expenditure, and help customers leapfrog into the digital era.
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.


Why did NASA not direct Curiosity to look for water?
While the world is going gaga over the presence of flowing brine or salty water on the Red Planet, questions are now being asked why the US space agency did not direct its Curiosity rover to the place where water proofs were recorded for a closer look.
The place where Mars Reconnaissance Orbiter (MRO) spotted signs of liquid water is a mere 50 km from where Curiosity is currently exploring the land.
According to the website, there may be two reasons for not sending Curiosity to click the perfect water picture.
“The farthest Curiosity has driven in a day is about 150 metres. So even with no obstacles in the way and no traffic, it would take about a year for the rover to get there,” the NPR report said on Wednesday.
The other reason may come as a surprise for you.
Since Curiosity may still be carrying some bacterial samples from the Earth, NASA may not want them to get mixed with possible bacteria or some single cell organism that the salty water on the Red Planet may be harbouring.
Curiosity, like other Mars rovers, is not a life-detection mission so these are directed to stay away from places where there may be water.
“In other words, NASA is not only concerned about us contaminating some other planet - it's also concerned about some other planet contaminating us,” the report added.
Curiosity has been working on Mars since early August 2012.
Adding to the growing literature on possible life conditions on the Red Planet, Curiosity found in April this year that it is possible that there is liquid water close to the surface of Mars.
The explanation was that the substance calcium perchlorate has been found in the soil which lowers the freezing point so the water does not freeze into ice, but is liquid and present in very salty water - brine.
Curiosity has also made the first detection of nitrogen on the surface of Mars, released during heating of Martian sediments.
The nitrogen was detected in the form of nitric oxide, and could be released from the breakdown by heating of nitrates, or a class of molecules that contain nitrogen in a form that can be used by living organisms.
The discovery adds to the evidence that ancient Mars was habitable for life.
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.


We are listening!

Solve the equation and enter in the Captcha field.

To continue

Sign Up or Sign In


To continue

Sign Up or Sign In



The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)