In the enthusiasm for lower rates, the small depositors' interests should not be sacrificed
Even though the headlines after Raghuram Rajan's rate cut were about loans getting cheaper, the Governor's focus seems to be on the small savings rates coming down. 'Small savings' is the term used for the government's schemes in which individuals deposit money with the government, or rather, the government borrows from individuals. These are the various post office schemes, Public Provident Fund (PPF), the Senior Citizen's Savings Scheme, and a few others.
Rajan has told the government, in no uncertain terms, that unless the government lowers the rate of interest it pays to the public, banks will not be able to do much by way of lowering the interest rates they charge on their lending, regardless of the RBI's actions. Since the individual depositor can get about 8.5 per cent from the small savings schemes, banks will not be able to compete for fixed deposits. Unless they get cheaper deposits, they won't be able to give cheaper loans. So, for the economy to move forward, the government must stop competing with banks.
At an early point when this argument was going on, I'd written on these pages that in terms of savings, India is a fixed income country, and the tens of crores of people have all their financial savings in FDs, PPF, post office deposits and such. The flow of money through the banking system basically amounts to these people lending to the government (by far the dominant borrower in the economy) and businesses." Now the banks and the government are fighting over who will get the public money at the cheapest rates!
In all this, the depositor's interest must be guarded. Real (inflation-adjusted rates) may be lower now, but in recent years, there have been many more periods when the real rates were negligible or negative. In this enthusiasm for lower rates, the government and the RBI must ensure that there must be a significant real return for the small depositors.