An analysis of latest small savings schemes interest rate changes and associated implications for retail fixed income investors.
Source and Citation: Article from ET Bureau published on Dec 30, 2023 originally titled “Small Savings Rates Unchanged for Most Schemes for March Quarter”
Analysis of this news for a layman
The Indian government has announced the interest rates for various small savings schemes like PPF, Sukanya Samriddhi, Senior Citizen Savings, etc., for the January-March 2023 quarter.
Rates have been kept unchanged for 10 out of 12 instruments from the previous quarter. There were only marginal increases in the 3-year time deposit rate, which went from 7% to 7.1%, and the Sukanya Samriddhi Scheme rate, which increased from 8% to 8.2%.
This indicates that the government’s preference is to maintain the status quo on small savings rates. They are in line with the comfortable inflation outlook and do not signal any changes in the direction of interest rates in the near future.
With bank deposit rates also at their peak, policymakers seem inclined to eliminate expectations of volatility in fixed income returns available to retail investors. Therefore, the mantra for now is rate stability.
Impact on Retail Investors
For Indian retail fixed income investors, the unchanged status of small savings rates has several implications:
- Stable Returns: Investors can continue to enjoy returns of 8% or more from safe sovereign-backed fixed-income assets for the first half of 2023. This is advantageous because alternate bank deposit rates may change quarterly.
- Financial Stability: This stability in returns supports the stability of consumption and borrowing decisions by households throughout this fiscal year, without concerns about volatility.
- Missed Opportunity: Investors may miss out on potentially higher returns in instruments like Sukanya Samriddhi, as interest rate cycles may have peaked. There is a possibility of rates decreasing later in 2023.
- Limited Allocation Choices: The stability in small savings rates limits the scope for tactical allocation across assets like bank deposits if small savings rates also changed dynamically each quarter.
While ensuring stability for now, investors need to assess whether the safety of their capital should take precedence over a slightly higher prospective return when considering their portfolio positioning for 2023, along with other factors like the trajectory of inflation and the evolution of monetary policy.
Impact on Industries
There is no significant direct impact on industries resulting from the status quo on small savings rates in this quarter. However, there are incremental implications for a few sectors:
- The unchanged small savings rates ensure that banks do not face deposit flight risks for now. Some stability in deposit costs, which are referenced to risk-free small savings rates, allows banks better predictability of funding patterns, which is critical for managing margins.
Housing/Real Estate Sector:
- By keeping rates on alternate savings avenues largely the same, home loan rates are also expected to remain in their current trajectory, at least in the first half of 2023. This maintains the premise of affordability for prospective buyers and benefits home financiers like HDFC and LIC Housing Finance.
Overall, the stability of small savings interest rates removes uncertainty concerning a key benchmark referenced by household and corporate borrowers across retail and MSME sectors. It helps in managing budgets and cash flows throughout this fiscal year.
Long Term Benefits & Negatives
The status quo on small savings interest rates has the following potential long-term impacts:
- Debt Market Stability: Ensuring stability in the debt market minimizes volatility risks for a wider borrowing base. This supports stable and durable growth rather than fluctuations driven by sentiment.
- Balancing Socio-Economic Priorities: Structurally aligning small savings as social security tools for low-middle-income groups balances socio-economic priorities and encourages responsible financial behavior.
- Incentivizing Misselling: Recurring extensions of the status quo may incentivize unscrupulous practices of selling deposits or insurance via banks, which could prevent financial sector reforms and innovations.
- Depleting Government Resources: Continuously capturing funds at lower yields through small savings prevents the efficient channelization of debt capital for infrastructure needs through bonds. This requires careful budget balancing.
While providing interest rate stability has its merits, recurring extensions of the status quo need to be calibrated with a progressive financial development agenda.
Short Term Benefits & Negatives
In the short term (2023), the unchanged small savings rate regime could have the following impacts:
- Protection for Vulnerable Groups: The status quo ensures that vulnerable lower-income groups have secured deposits with returns of 8% or more for the first half of 2023, providing them with income visibility.
- Encouragement for Consumption: With income visibility assured, households are more likely to engage in discretionary consumption rather than speculating about the loss of purchasing power due to interest rate changes.
- Weakening Real Returns: While the rates are stable, the real returns on instruments like Sukanya Samriddhi may be weakened if the peak of the policy rate cycle has indeed been reached.
- Arbitrage Risk: A slightly higher-yielding corporate deposit market may attract funds from bank deposits, potentially compromising the deposit stability of banks.
In conclusion, while the current situation is generally positive for fixed income investors, calibrated adjustments may be required selectively in the future to balance growth imperatives without destabilizing debt cost metrics. Stability is essential, but it has its limits.
Impact of Unchanged Small Savings Rates:
Indian Companies Likely to Gain:
- Private Debt Mutual Funds:
- With comparable return rates in small savings schemes, investors seeking higher returns might shift towards debt mutual funds offered by companies like HDFC Mutual Fund, ICICI Prudential MF, and Axis MF.
- Market Sentiment: Positive for debt mutual funds, with potential inflows and increased asset management fees.
- Non-Banking Financial Companies (NBFCs):
- Higher borrowing rates compared to small savings may lead some individuals to turn to NBFCs for loans, benefiting companies like Bajaj Finance, Capital First, and Mahindra Finance.
- Market Sentiment: Neutral to positive for NBFCs with strong credit profiles, depending on their loan growth and risk management.
- Microfinance Institutions (MFIs):
- Continued low small savings rates might encourage low-income individuals to rely on microloans from MFIs like Bandhan Bank and Ujjivan Small Finance Bank.
- Market Sentiment: Neutral to positive for MFIs, depending on their portfolio quality and risk management practices.
Indian Companies Potentially Impacted:
- Public Sector Banks (PSBs):
- With unchanged rates in government schemes, PSBs like SBI and Bank of Baroda might face competition from private banks offering higher deposit rates to attract retail investors.
- Market Sentiment: Neutral to slightly negative, depending on their ability to retain deposits and compete on other factors.
- Life Insurance Companies:
- Small savings rate stability might lead some individuals to postpone or reconsider investing in life insurance policies, impacting companies like LIC and HDFC Life.
- Market Sentiment: Neutral to slightly negative, depending on their product offerings and sales strategies.
Limited Direct Impact:
- Foreign Institutional Investors (FIIs):
- The news might have minimal direct impact on FIIs as their investment decisions are often driven by broader economic factors and global market trends.
- Market Sentiment: Minimal impact expected.
Disclaimer: This analysis is based on available information and future outcomes might differ. Always consult with a financial advisor for personalized investment advice.