Small savings schemes interest cut signals better fiscal alignment: SMERA

The rating agency has projected a repo cut of 25 bps in the April 5 policy meeting

The small and medium enterprises (SME) credit rating agency SMERA Rating has projected a repo cut of 25 bps in the April 5 policy meeting amid improved effectiveness of India's fiscal policy in further loosening of the monetary policy.

According to SMERA, the interest rate cut of 0.4 per cent to 0.9 per cent across the 12 government backed small saving schemes for 2016-17 signals a better alignment between the fiscal and monetary side of the economy.

The rate cut on small savings schemes, along with a projected fiscal deficit of 3.5 per cent for 2016-17 indicates the government's intent to improve its credibility in the macroeconomic policy making, the rating agency stated.

According to SMERA interest rate cut of 0.4 per cent to 0.9 per cent across the 12 government backed small saving schemes for 2016-17 signals a better alignment between the fiscal and monetary side of the economy.

SMERA Ratings Limited is a joint initiative of SIDBI, Dun and Bradstreet Information Services India Private Limited (D&B) and leading public and private sector banks in India.

In its outlook report SMERA said, "This move which was a long- standing demand by the Reserve Bank of India (RBI) will raise commercial banks' ability to lower their deposit rates and consequently, the lending rate when the RBI cuts the repo rate."

Until now, despite 1.25 per cent cut in the repo rate since January 2015, the banks have passed on an average only 0.6 per cent to the public in terms of lower lending rates.

Outlook report stated that, the ministry of finance has been sticking to its FRBM mandates of reducing its fiscal deficit by 0.3 per cent on an annual basis. Despite the fact that the plan and non-plan expenditures have received a boost of 15 per cent and 9 per cent respectively, this reduction is an indication of the path; the government is willing to take in order to meet its obligation.

A sustained decline in subsidy bill from the peak of 2.6 per cent in 2012-13, as a percentage to gross domestic production (GDP), now stands at less than 1.7 per cent. With government commitments declining even further with these interest cuts, the 2016-17 year number is expected to be lower as pressure on non-plan expenditure reduces.

"The government is trying to revive the economy by way of expenditure with reasonably high borrowing costs. Even though the move to cut rates of these schemes is being connected to decongesting the passage for RBI enabled interest benefits to the end-consumers, we believes that the government is trying to portray a broader image denoting efficiency and responsibility in its affairs," said SMERA.

The improved effectiveness of India's fiscal policy augurs well for further loosening of the monetary policy and SMERA projects a Repo cut of 25 bps in the April 5 policy meeting.