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Bank deposit rates unlikely to fall post cut in small savings rates

Author: Debasis Mohapatra/Wednesday, January 3, 2018/Categories: Fixed Deposits

Bank deposit rates unlikely to fall post cut in small savings rates

Mumbai: Interest rate cut in a host of savings instruments including PPF and National Savings Certificates (NSC) are not likely to prompt banks to slash deposit rates. Analysts are also of the opinion that despite slashing of small savings rates, these avenues would continue to attract investors in coming months.

“Reduction in small savings rate was based on demand and supply of money. As interest rates on these financial instruments are linked to yield of government bonds, this downward revision is a result of this movement,” D Ravishankar, founder director of Brickwork Ratings told The Finapolis.

The government recently revised small savings rates downwards for January- March quarter aligning it with bond yields. As per notification, Public Provident Fund (PPF) and NSC will garner a lower annual interest rate of 7.6%, down by 20 basis points from prevailing rates. Another popular postal savings instrument- Kisan Vikas Patra (KVP) will yield 7.3% and mature in 118 months.

The special savings scheme for girl child- Sukanya Samriddhi account will offer 8.1% return from the existing level of 8.3% annually. Similarly, term deposits of 1-5 years will fetch a lower interest rate of 6.6-7.4% for January-March quarter, while the 5-year recurring deposit will generate a return of 6.9% as part of this revision.

However, return on the 5-year Senior Citizens Savings Scheme has been retained at 8.3%. Notably, interest rates on all small savings schemes are being revised on a quarterly basis since April last year.

On the likelihood of further reduction in interest rates in coming quarters, Ravishankar said that chances of further reduction seemed remote at this point of time.

“Post demonetisation, banking system was flushed with liquidity. Higher liquidity and tepid credit growth had led to lowering of deposit and lending rates apart from resulting in easing of yields across various debt securities. However, things have drastically changed in recent months and we see lending activity picking up in next 3-4 months. So, any meaningful revival in credit growth will restrict banks to cut deposit rates in the near future,” he said.

Small savings rates are also not likely to fall further as rising inflation and higher government borrowing are likely to push up bond yields in coming months.

Meanwhile, another credit rating agency also echoed similar stance on the matter. “Despite the recent reduction in small savings rates, we do not expect banks to follow suit and reduce deposit rates, given the recent re-emergence of the liquidity deficit. Moreover, systemic liquidity is expected to remain relatively tight in January-March quarter, based on the anticipated pickup in credit offtake,” Aditi Nayar, Principal Economist of rating agency ICRA said.

It also said that despite the reduction in small savings rates, deposit flow would remain sound during January-March period of next year.

“Despite slashing of rates, inflows into small savings schemes are likely to be healthy in Q4 FY18,” ICRA said.

According to the credit rating agency, interest rates offered by small savings schemes are still higher by 30-95 basis points than bank fixed deposits for maturities higher than three years.

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