Recently, there has been a spate of reports arguing that in line with the drop in recent policy benchmark and policy rates, small savings (SS) rates ought to be reduced. Banks argue that due to absent long-term fixed rate deposits, they cannot lend at fixed rates. In SS, we have a long-term fixed rate product and the proposal to link it to short-term rates turns the problem upside down. The actual issue is, whether banks can be given such tax subsidy for long-term deposits of 10 years, in which case, bank deposits will indeed be competing with SS.
Without that, none of the 'improvements' suggested in the rate design helps. This is not to suggest that SS rates should not be changed. But such review of rates cannot be in response to a change in short-term benchmarks. Rather, such review should take into account the government's alternate marginal cost of funds and be based on movements of such rates over a longer tenure.
Indranil Chakraborty, Mumbai
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