Small savers to feel the pinch

Investments in RBI Relief Bonds capped at Rs 2,00,000 per year

The Union Budget 2002-2003 has cut the interest rates on administered savings schemes by 50 basis points. Though it was widely expected that the rate cut would be around 1%, the actual rate cut has been 0.50% as against 1.5% in the last budget. This rate cut is applicable to RBI Relief Bonds also. The interest rate on RBI relief bond was 8.5%, which post-budget stands at 8%. Further, a ceiling of Rs 2,00,00 per year has been introduced on these bonds.

The administered interest rates will now be benchmarked to the average annual yields of government securities of equivalent maturities in the secondary market. The effect of this will be that the administered rates will be more responsive to the changes in interest rates.

Investments in small saving schemes account for around 90% of the household savings. Though there has been a marginal cut in the rates investors will have to relook at the various investment option available to them. By capping the ceiling on RBI Relief Bonds at Rs 2,00,000, the investors will turn to other investment avenues where there is no or minimal lock in period at the same time returns are higher. These investment avenues can be mutual funds or bank deposits. Again with the dividend income from mutual funds now being taxed in the hands of the investor, it makes sense to invest in the growth scheme of the mutual fund scheme.

The argument in favour of the rate cuts is that in order to stimulate investment in the economy, the cost of funds has to be brought down. Lower interest rates are seen as one of the key elements in reviving sluggish economic growth. The Economic Survey too had highlighted the dangers of higher interest rates on contractual savings by stating that higher yields compared to the zero risk on these instruments attract investors away from other non government borrowers leading the latter to offer higher lending rates.

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