The Telegraph
Since 1st March, 1999
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Savers left bleeding in two-way squeeze

Mumbai, Feb. 28: Thousands of individuals who depend on interest income today were a worried lot today as the Reserve Bank of India (RBI) brought down interest rate on saving accounts by half a percentage point to 3.5 per cent.

The move came hours after the finance minister Jaswant Singh brought down rates of interest on public provident fund (PPF) and small savings schemes by one percentage point, with effect from March 1.

If this was not enough, such investors now have more reasons to be worried. The central bank also lowered the repo rate, its key short-term rate, by half a percentage point to 5 per cent from March 3. This is the third time in the current fiscal year that this rate — at which RBI borrows funds from the market and which banks use to benchmark short-term deposits and loans — has been slashed.

With repo rate being cut, the apprehension is now that commercial banks' may further bring down interest rates on term deposits. However, senior banking circles denied such a possibility, pointing out that interest rates are likely to remain stable. “Any reduction in deposit rates will not be immediate,” a senior official from one of the leading private sector banks said.

“The savings account rate has been cut from four per cent to 3.5 per cent per annum effective tomorrow in view of the current macro-economic and overall monetary conditions,” RBI deputy governor Rakesh Mohan said.

He added that the bank has also slashed the repo rate for government securities by 50 basis points to 5 per cent, with effect from March 3.

The savings account rate is the only interest rate on deposits regulated by the RBI, and it has remained at this level over the past 6 years. Even as depositors were worried about the cut, an official from a nationalised bank said, interest rates on fixed deposits have come down by more than 2 per cent over the past couple of years. “Therefore, bringing down interest rate on savings account by half a percent is not something that they will worry immensely,” a dealer said.

The RBI's action saw government bond prices leaping across the board spurted with yields falling in tandem. While bond prices initially drove upwards in reaction to the cut in small-saving rates by Singh, the ascent only got bigger after news of the reduction of savings bank rate and repo rate trickled in.

Yields on benchmark ten-year paper which began sharply lower at 6.47 per cent, fell to 6.35 per cent and later dipped to below six per cent at 5.90 per cent after trading hours when news of the saving bank and repo rate cut came in.

It may be recalled that falling yields on government securities as a consequence of the monetary and credit policy presented last October was a major factor in influencing banks' to lower interest rates on deposits.

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