Balancing Act on Small Savings Schemes

The govt has to juggle between adjusting interest rates in line with moderation in yields on govt securities in secondary markets and mobilising funds for fiscal deficit

- SIDDHARTHA SANYAL

SAVINGS ARE CRUCIAL for growth and investment as they help mobilise capital into productive sectors of the economy. In India, household savings play a key role in overall savings as the former accounts for about 18% of GDP and about 60% of gross savings. Bank deposits, with a share of over 40%, are by far the largest constituent of household financial savings. The other modes of household financial savings typically encompass currency, shares and debentures, small savings, life insurance, and provident and pension funds.

Trends in interest rates on these alternative savings instruments present a mixed bag. Bank deposit rates have softened in recent months, partly reflecting the reduction in the Reserve Bank of India's (RBI) policy repo rate by 100 basis points (bps) between February and June. The central bank also announced a slew of measures to provide ample liquidity in the banking system, ensuring better transmission. The weighted average term deposit rate on fresh deposits declined by about 27 bps between January and April. Going ahead, transmission to deposit rates is likely to continue with surplus liquidity.