India to move cautiously to cut interest rates on retail deposits

By Rajesh Kumar Singh

NEW DELHI (Reuters) - India will have to move cautiously on revising down interest rates on retail deposits, Finance Minister Arun Jaitley said on Friday, as it could hurt vulnerable sections such as retired employees.

The finance ministry had agreed to cut interest rates offered to millions of savers in about $137 billion federal deposit schemes, following a larger-than-expected rate cut of 50 basis points by the central bank in September.

However, the decision has yet to be implemented.

Jaitley said cutting interest rates on small savings too radically could hurt some sections of society.

"We as an elected government have to look at it, in addition to the economic principle, with a tinge of political pragmatism because lots of people are dependent on it," Jaitley said, while speaking at the Hindustan Times Leadership Summit in New Delhi.

He said the government would move in that direction cautiously.

The Reserve Bank of India has been cutting rates this year to support the economy, but has been frustrated by commercial banks failing to pass the cuts onto their customers in full.

RBI Governor Raghuram Rajan, who has cut policy rates by 125 basis points so far this year, has been pressing New Delhi to lower rates on retail deposits as it hurts bank deposits.

The government manages the scheme, known as the National Small Savings Fund, offering an average annual return of 8.5 percent on term deposits, compared with near 7.5 percent paid by commercial banks.

Bankers say transmission of lower rates through the system has been partially delayed as they fear depositors could shift funds to retail schemes if they reduced interest rates beyond a point.

While leaving policy rates unchanged at 6.75 percent on Tuesday, Rajan said he was focusing on the transmission of rate cuts passed earlier this year though he remained open to ease rates further.

"If deposit rates don't ease, the banks' ability and appetite to cut base rates too will be limited," said Shubhada Rao, chief economist at Mumbai-based YES Bank.

Indian savers are getting 2-3 percent in real interest rates on their bank deposits as retail inflation has eased to near 5 percent from around 10 percent in 2013.

Analysts said the government would have to consider a cut in interest rates on retail deposits while keeping in mind the interest of small savers.

"The government has to cut the small savings' rate enough to boost transmission, but not too much to hurt savers," said Sonal Varma, an economist at Nomura. "A balancing act is required."

(Additional reporting by Neha Dasgupta in MUMBAI, Writing by Manoj Kumar; Editing by Jacqueline Wong)