Welcoming the Reserve Bank of India (RBI)’s decision to cut interest rate by 50 basis points (bps) from 7.25 per cent to 6.75 per cent, the finance ministry said the government would review small savings schemes to enable transmission of the central bank's rate cut by banks.
“We look forward to the transmission of these cuts to the rest of the economy and we’ll work to facilitate this transmission, including by reviewing the framework of small savings,” Finance Minister Arun Jaitley said at a press briefing here on Tuesday.
The briefing was also attended by Economic Affairs Secretary Shaktikanta Das and Chief Economic Advisor Arvind Subramanian. Small savings schemes include initiatives such as the National Savings Scheme, Kisan Vikas Patra, post office deposits, and Public Provident Fund. The interest rates for these range from 8.4 per cent for a one-year deposit to 9.3 per cent for the five-year Senior Citizens Savings Scheme.
Banks have been reluctant to transmit the entire policy rate cut to borrowers as they want to keep their deposit rates attractive to match with those in small saving schemes, popular among masses. Before Tuesday’s RBI decision, banks had passed over to consumers only 30 bps of the 75 bps in rate cuts that the central bank had effected this year.
When queried on the details of the proposed small savings review, Jaitley said there was no time limit attached to the issue and it would be done in due course.
“Let’s not prejudge the issue (of reviewing small savings rate). The government will undertake a review. And review will imply review of all aspects,” Das added.
Jaitley said the rate cut by RBI implied inflation pressures “moderated significantly”. “The government is fully committed to meeting fiscal-deficit targets in order to consolidate the gains achieved by the contained inflation. RBI’s decision will significantly provide policy support to the real economy and help in the recovery process.”
According to Subramanian, the boost to the economy will come from confidence and investment that comes through the rate cut. “The RBI has signalled it continues to have an accommodative policy stance. So that should also reinforce confidence and a hope there can be more investment going forward.”
He also hinted the government would review its 2015-16 gross domestic product (GDP) growth projections after data for the July-September quarter was available.
On Tuesday, RBI had also revised downwards its real GDP forecast for 2015-16 to 7.4 per cent from its earlier expectation of 7.6 per cent. The last economic survey had estimated a GDP growth of 8.1-8.5 per cent for the year, though Das, on two separate occasions, had said it might be 7.5-8 per cent.
Among the other announcements by RBI on Tuesday was allowing external commercial borrowings through rupee-denominated offshore bonds with no end-use restrictions, increasing foreign investment limit in government securities from 3.8 per cent to five per cent by March 2018, and allowing two per cent foreign portfolio investment (FPI) in state securities.
Das noted there was no exchange-rate fluctuation risk for rupee-denominated bonds, since the entire bond would be raised in rupee and repayment would also be in rupee. “There is appetite for these bonds.”
He said the increase in FPI limit for government securities would lead to additional inflows of Rs 1.2 lakh crore, of which Rs 26,000 crore would flow in the current financial year. The allowing of FPI in state securities, or state development funds, would mean roughly Rs 50,000 crore flow into state government securities by March 2018 and about Rs 7,000 crore in the current year.
“This is also something which goes in line with the principle of cooperative federalism, which the government has been emphasising quite a lot about. State governments have also been demanding for quite a long time about FPI participation in state government bonds,” Das added.