Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Apocalypse in the waiting for small savers - Outside View by S.S. TARAPORE
  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Apocalypse in the waiting for small savers
Dec 15, 2015

The policy repo rate (i.e. the rate at which banks access funds from RBI against the collateral of government securities) was left unchanged at 6.75 per cent in Governor Rajan's Monetary Policy Review of December 1, 2015. This should be of some relief to savers who are constantly under threat of lower interest rates on term deposits. To get a better understanding of policy intent, it is necessary to draw some inferences of relevance to depositors.

What the Policy portends for the ensuing period

The policy statement clearly says that the accommodative stance of policy will continue and that policy changes would be data determined. Given the political economy realities and the predilections towards a higher real growth rate, the depositor should interpret this to mean that, in the immediate ensuing period, policy interest rates would remain unchanged or under certain evolving developments be lower. A rise in policy rates in the next few months can be ruled out.

Link between the repo rate, the base lending rate and deposit rate

The RBI has expressed its concern over the slow transmission process between the RBI's signaling repo rate and the banks' base lending rate. The RBI's preference is clearly that banks should move to a marginal costing of funds rather than an average costing. Marginal costing of funds would provide for a faster transmission of policy signals. If banks lower rates for increased credit or for new borrowers, there would be considerable heartburn for existing borrowers. How would all this impinge on depositors? With pressure from RBI to step up the transmission process, the banks could conceivably undertake drastic reductions in term deposit rates. Savers have very little collective bargaining power and would be at the mercy of banks.

How should depositors protect themselves?

Depositors should go in for the highest maturities say up to 3 years (locking in for longer periods, at this stage, is not desirable).This should be the approach for renewals of term deposits as also for fresh deposits. Furthermore, almost all depositors keep savings bank balances, well in excess of their precautionary requirements. Depositors should be vigilant and cut down on excess balances in savings bank accounts.

Government small savings rates

At the present time the government's small savings rates are higher at 8.7-9.3 per cent, while banks offer 7.5-8.0 per cent. Banks have been clamouring for a reduction in small savings rates as bank deposits are becoming uncompetitive. If past trends provide guidance, the government would not reduce these rates before the February 2016 Budget. Hence, savers should quickly lock themselves in these schemes before the rates are reduced. In particular, senior citizens should lock into the Senior Citizens Savings Scheme.

The provident funds are of a different genre. These funds provide the only social security that the bulk of savers have and it is necessary to ensure that the longer term interest rates of long-term savers is not bartered away at the altar of the present frenzy of trying to appease borrowers with lower and lower lending rates. Besides, the ground realities are that the Ministry of Finance and the Ministry of Labour will be locked in battle with the Ministry of Labour claiming that the Employees Provident Fund Organisation ( EPFO) has sufficient funds to pay a higher rate this year. While this tussle goes on, savers should maximise their contribution to the various provident fund schemes.

Real rates of interest and the appropriate price indices

It is recognised the world over that savings have to be rewarded in real terms. It is often argued that this real rate should be around 1.5 -2.0 per cent. The intriguing question is which nominal rate of interest and which index should be used and what should be the time period for evaluation i.e. average of one year, 3 years or 5 years. Those arguing for low nominal rates of interest argue that the RBI has erred in using the Consumer Price Index (CPI) saying that food has a weight of around 50 per cent and monetary policy is not the appropriate instrument for tackling food inflation. The standard international index used the world over has been the CPI and now that the RBI has veered round, to using the CPI index, the argumentative Indian would like to say that this is the wrong index! The RBI would do well to persevere with the CPI as the indicator. It is not as if the Wholesale Price Index (WPI) is not monitored. In earlier years, the emphasise was on the WPI while the CPI was considered a secondary indicator. In the present situation, the RBI would do well to continue to emphasise the CPI and as it already does also look at the WPI (see C.Rangarajan and R.Kannan, Understanding the CPI-WPI Divergence, Hindu Business Line, November 28, 2015).

Warning to savers

It needs to be stressed that savers are going to face an apocalypse in the foreseeable future. They will have to proactively decide how to allocate their meagre savings between different instruments. Increasingly, they will have to move away from fixed return deposits and similar instruments and move to mutual funds and even equity. These instruments are, admittedly, risky but the common person can no longer be completely risk averse. The policies relating to savings have been unfavourable to savers for many years and this could do damage to the fabric of India society. It is worth recalling that many years ago when the authorities went on an insensate interest rates spree, it was Mr. Rajnath Singh who, in 2003, strongly opposed the reduction of interest rates for savers and brought back sanity to the system.

Please Note: This article was first published in The Freepress Journal on December 14, 2015. Syndicated.

This column, Common Voice is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Hindu Business Line, is titled Maverick View.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "Apocalypse in the waiting for small savers". Click here!


More Views on News

What They Forgot to Tell You About Sensex at One Lakh (Smart Contrarian)

Nov 29, 2017

Stocks that could beat Sensex returns in the long term.

How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

Jun 10, 2017

Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

Have You Submitted Your Tax Saving Investment Declarations? (Outside View)

Feb 17, 2018

PersonalFN explains the care to be taken while submitting tax saving investment declarations.

The Foundation for Sensex 100,000 is Laid (The 5 Minute Wrapup)

Feb 17, 2018

Top three reasons for Tanushree's presentation at Equitymaster Conference to be centered around a possible 30% correction.

Vignettes From Ireland (Vivek Kaul's Diary)

Feb 17, 2018

Bill bonner discusses how the US government have created a phony picture of the real condition of the country.

More Views on News

Most Popular

Here's What You Should Do in this Market Crash(The 5 Minute Wrapup)

Feb 6, 2018

The market correction has provided a golden opportunity to buy five high-quality safe stocks.

As the Market Corrects... It's Time to Buy More(Smart Contrarian)

Feb 5, 2018

The recent sell off in the stock market offers buying opportunity in some quality small caps.

The Era of Easy Money is Coming to an End. What Happens Now?(Vivek Kaul's Diary)

Feb 9, 2018

The easy money policy of the Federal Reserve of the United States, which drove up stock markets all over the world, is ending, with the Federal Reserve looking to shrink its balance sheet.

When Small is Not Always Beautiful(Chart Of The Day)

Feb 6, 2018

Big companies enjoying tax deductions and exemptions have an edge over the small companies.

What Should Mutual Fund Investors Do After LTCG Tax Norms(Outside View)

Feb 6, 2018

PersonalFN explain what investors should after LTCG tax norms.


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Feb 16, 2018 (Close)