The government's move to slash interest rates on all small saving schemes will pave the way for a market linked interest rate structure and enable faster monetary transmission, says a Deutsche Bank report.
According to the global financial services major, this is a bold political measure and would lead to a more accommodative policy stance by the Reserve Bank.
"This is a significant policy reform, which will pave the way for a market-linked interest rate structure and enable faster monetary transmission," Deutsche Bank said in a research note.
The slash in interest rates on small savings, coming close on the heels of the union budget where the government adhered to fiscal consolidation, has increased market expectations of a more 'dovish' RBI on April 5 and for the rest of the year, the report said.
"The RBI may look to slash the Cash Reserve Ratio (CRR) as well, in addition to a cut in the repo rate. Our banks analysts estimate that a 50 bps CRR cut would infuse to Rs 470 billion of additional liquidity and be very positive for banking stocks," the report added.
On March 18, the government slashed interest rates on all small savings schemes, including PPF, Kisan Vikas Patra (KVP) and senior citizen deposits, to make them more market aligned.
With interest rates on small savings not adequately benchmarked to policy rates (until this announcement), banks have complained that the "stickiness" of small savings rates hampers monetary transmission by deterring them from lowering deposit and lending rates.
"With the sharp cut to rates (40-130 bps) on April 1, we expect the banks to cut their lending rates by a quantum that may be higher than what we have seen so far," it added.
In the current rate cut cycle, policy rates have been slashed by 125 bps but the base rate has been cut only by 70 bps.
Interest rate on Public Provident Fund (PPF) scheme has been cut to 8.1 per cent for the period April 1 to June 30, from 8.7 per cent, at present.
Similarly, the interest rate on KVP will be reduced to 7.8 per cent from 8.7 per cent while senior citizen savings scheme of five years would earn 8.6 per cent interest compared with 9.3 per cent.
