The
government is set to reduce interest rates on small savings products such as
public provident fund and National Savings Certificate over the next few days -
a move that will impact returns on your bank fixed deposits but also pave the
way for banks to pare lending rates in the coming months and reduce the EMI
burden.
The new rates are expected to be notified over the next few days with the government set to announce quarterly revision instead of an annual reset, which is the norm currently, sources said.
Banks
are expected to follow the small savings rate cut with lower fixed deposit
rates, which over a period of a few months may translate into lower lending
rates. In the past, lenders have been reluctant to pass on the benefit of lower
rates to borrowers. The
Reserve Bank of India and banks have been seeking a reduction in small savings
rates, arguing that PPF and other products offered higher returns when compared
with fixed deposits, resulting in a flight of funds to the government
schemes.
As
a result, banks have been forced to maintain higher deposit rates, making it
difficult for them to pass on the benefits of lower policy rates. Bankers have
said higher small savings rates have meant that lending rates have been cut by
a lower extent compared to RBI's policy rate reduction of 125 basis points
last year.
Although
the move may trigger a fall in returns on your savings, it is seen as a reform
move by the government, which recently announced a plan to end subsidies to the
high-income segment. The reduction also comes at a time when the middle class
has become more comfortable investing in debt and equity mutual funds, which
over the past decade have emerged as an attractive savings tool.
Source:-The
Economic Times
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