PPF rate cut: Why Modi govt is wrong in linking small savings interest rates to bond yields

The Modi government at the Center has said its decision to reduce small savings interest rates across the board by 0.1 percent (10 bps) for the upcoming quarter April-June 2017 is in keeping with its major resolve to align small saving interest rates with yields on government bonds. In April 2016, it started fixing interest rate every quarter for small savings schemes.

Thus the hugely popular public provident fund (PPF) scheme would earn for its subscribers 7.9 percent per annum for the quarter April-June 2017 from the hitherto 8 percent per annum. Kisan Vikas Patra would earn now 7.6 percent per annum and Sukhanya Samriddhi scheme that focuses on the girl child will earn 8.4 percent per annum at par with senior citizens savings scheme.

One expected the Modi government to walk the talk that the PM made on 31 December 2016, the day banks returned to normalcy after their hectic tryst with demonetisation. Prime Minister Modi had on that day told the nation that he is going to pay senior citizens 8 percent interest on bank deposits upto Rs 7.5 lakh locked in for ten years. And this interest would be paid monthly. The monthly income of Rs 5,000 that was the bottom line alas has turned out to be yet another tall promise. It is yet to be implemented.

Thank goodness, the savings bank default interest rate of 4 percent hasn’t been disturbed.

It is wrong to peg small savings rates with government bond yields because the two are not on all fours. Government bond yields fluctuate to the gyrations of its fiscal and monetary policies as well as to numerous endogenous and exogenous factors like US bank rates etc. whereas small savings interest rates have but one counter—to foster the savings habit on the small man and provide him with a decent return in return.

How can the government visit him with penalty by way of lower interest rate for no fault of his? If anything the government should bear the cross for the loss if any in bond yields to the investors who incidentally are deep-pocketed moneybags.

To be sure, 0.1 percent may appear to be too small to warrant an alarmist reaction but it is not the small percentage that matters as much as the portends it sends out—the small man could be the victim of the happenings in the cacophonic world of bonds in which he neither participates nor has any control. Why should the small man be punished just because money bags have had to ride a rough weather in the rough and tumble of the world of bonds?

It reinforces the depressing view that the Modi government is unsympathetic to the concerns of the small man though the BJP has been winning successive state elections thanks to his unstinted support.

It was the small man who reposed faith in Modi’s rationale for demonetisation when the opposition taunted him for making the small man stand in serpentine queues for days and weeks. Modi promised reward for his forbearance during the harrowing period. Look what he has got! A negative reward!