Ecovoice A further cut in small saving interest rate?
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Ecovoice A further cut in small saving interest rate?

by
Mar 6, 2005, 12:00 am IST
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By Geeta

Days before his retirement, G.N. Bajpai, chairman of the Securities and Exchange Board of India, submitted a report of the expert committee he was heading and advised the government to further cut the interest rates on small savings.

The committee wanted the government to link the interest rates on instruments like National Small Savings to curb inflation. Simply put, with inflation declining, after touching a high of over 8 per cent, the interest rates on small savings had to come down. Ironically, enough Bajpai gave this report only when the inflation rate had started coming down. It is a matter of conjecture whether he should have given such a report in August 2004, when inflation had become a big headache for the government. So, the timing has been excellent!

The senior citizens aleady have a different rate which, by logic, would come down if the whole mechanism is linked to inflation. The expert committee'srecommendations are timed not only to the sober price rise situation but have come days before the Annual Budget.

The Bajpai Committee, it seems, has endorsed the recommendations of the Reddy Committee which wanted the small savings rate to remain within the 50 basis points of the yield on comparable government securities. The former SEBI chairman (Bajpai has since been replaced by M. Damodaran of course had some lip sympathy for the senior citizens, who, he argues, should be given a different rate. But then, the senior citizens aleady have a different rate which, by logic, would come down if the whole mechanism is linked to inflation. The expert committee'srecommendations are timed not only to the sober price rise situation but have come days before the Annual Budget. This could be a message for the pensioners, the old people living on their savings, that they should be prepared for yet another cut on their returns on investment. In other words, they should be ready for further decline in their living standard.

There is another angle to the entire financial restructuring paradigm which is underway. The government, aided by the pink press, would like more small investors, old and young, to shift to the stock market from the safe haven of small savings. The trouble with investors is that they follow the herd mentality and enter the market after the indices have had their run and the smart fund managers are about to exit. They readily enter into a trap and burn their fingers losing their lifetime saving. No amount of reasoning would suffice with investors when the market is in a bull run. Any more reduction in the interest rates of small savings would further allure the gullible people to go the risky Dalal Street way.

But then, it suits Finance Minister P. Chidambaram, who is willing to bend to any extent to please the foreign institutional investors, the main drivers of the market. He would not listen to the Reserve Bank of India Governor, Y.V. Reddy, who has been desperately trying to be heard. The RBI chief is not at all comfortable with the excessive inflows from the FIIs which, he argues, are difficult to manage for India without a cost. On the contrary, Chidambaram would flaunt the rising Sensex as his achievement. Who will save the small investors when the market crashes overnight?

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