Budget 2020: Govt's reliance on small savings makes rate transmission tough

Bond yields will also be under pressure due to Rs 2.7 trillion of switches in FY21, which increases duration risk

The government’s increased reliance on small savings is bad news for rates transmission no matter what the Reserve Bank of India (RBI) instructs banks.

The central bank has lowered repo rate by 135 basis points since February, but the banks have lowered their lending rate by less than 50 basis points. This comes even as the money market had passed on the lower rates fully. Banks, however, for long, have complained that they cannot lower their lending rates if deposit rates cannot be lowered too. And, deposit rates cannot fall much below the small savings rates offered by the government