On Interest Rates Give A Thought To Savers To

When we think of the economy, there are largely two groups of people – the savers and the borrowers.

Who Are These Groups Of People And What Do They Signify?

Let us first look at the savers.

When we talk of savings, most middle income Indian households are heavily invested in public provident funds, post office schemes and fixed deposits, such as FD interest rates in SBI. These are salaried individuals, very small business owners and some daily wagers who fix a certain percentage of their daily, weekly or monthly salary for investing into the above-mentioned government programmes in the hope of securing their future.

Public Provident Fund scheme was launched in 1968 by the Ministry of Finance’s division called National Savings Institute. Its purpose was to encourage the citizens of India save unutilized, surplus income in an interest generating and tax saving instrument. The reason it become so attractive was because the savings in public provident funds were completely guaranteed by the Government of India and the Indian courts cannot touch the financial contents, except under special exemptions, such recovery of unpaid taxes.

The Indian Postal Service, a mammoth government enterprise, introduced various products to encourage the savers to save. These include recurring deposit accounts, post office monthly income scheme, savings scheme for senior citizens, Kisan Vikas Patra, National Savings Certificates and Sukanya Samriddhi Accounts to name a few. All these products offer varying levels of interest, term of investment and caveats to withdrawal.

The Fixed Deposit has been among the favourite investment routes of middle income Indians for a very long time. The reason behind it was it offered nearly similar levels of interest as government-controlled programmes, such as public provident fund and post office schemes without the lock-in period or other strict control measures.

Let Us Now Look At Who Are The Borrowers

The largest borrower is the Government of India followed by other large private and public enterprises. The money saved flows through a regulated banking network to these borrowers. The government uses these funds to finance a plethora or economic activity, including creating public private partnerships for the development of infrastructure, technology, industry and agriculture. Some of the returns from these economic activities are used to repay the loans taken from the savers along with an interest component which makes it a financially sensible investment.

Then What Changed?

A lot actually.

Looking at the data for the last decade, in 2008 the FD interest rates in SBI hovered around 7%. With the subprime crisis of 2008 and subsequent years of slow growth, the government tried to experiment with a reduction in the FD interest rates in SBI, bringing them to a decade low of little over 4% to serve as an impetus for borrowing and economic growth.

The year 2012 saw FD interest rates in SBI reach a 10 year high of 8.5%. Thereafter, with the new government, came new economic policies and the last three and half years have seen a steady decline in the FD interest rates in SBI. In the year 2018, FD interest rates in SBI have settled at around 6%.

What Does This Have To Do With Savers And Borrowers?

When bureaucrats, politicians and CEOs lobby to reduce interest rates, it makes government and enterprise borrowing cheaper and lending uneconomical. With a large portion of savings invested in public provident fund, post office schemes and fixed deposits the middle-income household savers feel short changed.

Public provident fund, post office schemes and FD interest rates in SBI are no longer attractive options for savers who are now looking for other avenues for investment. Whilst this is not a bad scenario, it does pose significant problems for the government and enterprise. Very quickly, savers will (if they haven’t started already) start withdrawing their hard-earned money from these avenues in favour of higher risk and possibly more volatile mutual funds, equity linked savings schemes and direct equity investments.

Without Cheaper Credit, government and enterprise will look toward money which is costlier to borrow, thereby increasing the costs of products and services that are subsequently produced through the infusion of expensive loans.

The Reserve Bank of India has a tight rope to walk. While it tries to keep interest rates at a steady 6 percent, the market is neutral in its view. The Reserve Bank is looking at a give or take 4% mid-term inflation target while attempting to bolster growth. 

The view on inflation beyond the current fiscal, in all probability, will be shaped by many factors. Chief among those is international crude oil prices, that have steadied and moved sharply up since August 2017. Second, raw material prices have also strengthened globally, backed by a strong demand from China.

The government and the central bank of India need to renew public interest in Public provident fund, post office schemes and FD interest rates in SBI.