'Higher small savings rates hit monetary transmission'

SMALL SAVERS GET BETTER RETURNS THAN FORMULA RATES, BANK DEPOSITS LOSE OUT

- SAIKAT NEOGI

WITH THE INTEREST rates on most small savings instruments being higher than their formula-based rates, transmission of policy rates to bank deposit rates is getting limited, especially in an easing cycle, because of the potential substitution effect, the Reserve Bank of India's October bulletin noted.

"A large interest rate differential in favour of small savings could lead to a migration of deposits away from banks," it added.

In the case of 1-year post office term deposits, the rate set by the government is higher than the formula-rate by 1.44 percentage points (pp), followed by 2-year term deposits, where the difference is 1.38 pp.

In the case of Public Provident Fund (PPF), the difference is the least at 0.27 pp.

While the interest rate for State Bank of India's (SBI) retail term deposit for 5-year and above is 6.05%, it is 7.5% for 5 year post office term deposit.