Status quo on interest rate on small savings must stay

It seems that the new fiscal year has kick started amidst a great deal of confusion for the government. The confusion is evident by the fact that the government has reversed some crucial financial decisions, immediately after having brought them in public domain. Interestingly, both the U-turns took place on the very day of April 01.

The first was deferring the implementation of the mandatory use of audit trail in accounting software used by the companies by a year to April 01, 2022. Actually, companies had urged the government to extend the deadline as they needed some time to comply the norm and hence it was a wise decision and India Inc has welcomed the decision, no matter if it was a case of rolling back.

The apple of discord lies with the rollback of reduction of interest rate on a host of small savings, after having issued a notification. Not to mention, the decision has grabbed the attention of the entire nation as it concerns common man. The interest rates being offered by the government on various small deposits are already on the low ebb and any further reduction would have only meant inviting the ire of the people who constitute nearly two-thirds of the folk that live on the earning generated by interest income. An undesirable outcome is the negative real interests that people are now earning on their fixed deposits.

The reversal decision was prompted by the ongoing Assembly elections in States like Assam and West Bengal implying a lot to those whose prime source of wealth generation is by way of interest income that too on various savings schemes like PF, fixed deposit among others.

There is one more interesting twist to the development. It was on Sunday last that the country's largest lender, State Bank of India has announced a hike in the interest rate on home loan by 25 basis points. SBI has hiked minimum interest rate on home loans by 25 bps to 6.95 per cent since April 01 as a clear signal that soft interest cycle for home loan borrowers is over. Again, the SBI being the trend setter, other lenders could soon follow the suite.

Normally, the hike in lending rate acts as a tell-tale for the hike in deposit rates too as per the time-tested norm. Hence, one can only hope that the government may not go for reduction in interest rate on small savings even after the election season in North-Eastern States was out.

RBI's accommodative stance on interest rate, when it reviews its annual monetary policy later during the week, will further put a stamp on the pause in the drop of interest rate on small savings.