The Telegraph
Since 1st March, 1999
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Small savings take rate rejig hint

New Delhi, Feb. 11: The government’s decision to withdraw 10 per cent bonus on post office monthly income scheme could well mark the beginning of a rationalisation of the administered interest rate regime.

The withdrawal of bonus on fresh deposits of post office savings (from February 13) comes close on the heels of a reduction in the rate of interest on EPF deposits. Some analysts are now tempted to believe that this could well mark the beginning of a new pattern.

While withdrawing the bonus incentive, the government yesterday reduced the rate of penalty on premature withdrawal of money under the post office monthly income scheme.

A roadmap for rationalising the administered interest rate regime on small savings has already been provided by the Rakesh Mohan committee.

Among other things, the committee has recommended that interest rates offered by small savings schemes should be benchmarked against yields on government securities of similar tenure. This means the interest rate offered by a three-year post office time deposit should be in line with returns offered by a three-year government bond.

In the long-run, the government wants returns offered by small savings schemes to be market-determined.

According to the finance ministry, even after the withdrawal of the 10 per cent bonus on post-office monthly income scheme the effective rate of return will be 8 per cent, which is higher than bank fixed deposits and government deposits of comparable maturity.

Analysts felt that any rationalisation of the administered interest rate regime will have to take into consideration the the funds mobilised by these schemes.

For instance, in 2005-06, aggregate savings deposits in post offices are estimated to mop up Rs 80,000 crore, while savings certificate schemes (NSC and KVPs) are estimated to mobilise Rs 3,000 crore. PPF, on the other hand, is expected to accumulate savings in the range of Rs 11,000 crore.

Besides, following the roadmap, as laid down by the Rakesh Mohan Committee, may not be easy in the short-term as yields from government bonds have come down drastically in recent years.

“In March 1996, a ten-year government bond carried a coupon rate of 14 per cent. This has significantly come down to about 5 per cent in October 2004,” an executive of a Delhi based said.

Any modification in the small savings segment can be contentious as the government is planning to introduce an EET (exempt-exempt-tax) scheme.

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