The interest rates on small sovereign savings products have been reduced sharply. This is a result of the sharp reduction in the repo rate that the Monetary Policy Committee has affected in its meeting on 26th March. The way savings rates are determined now, this linkage is more or less automatic as the rates on such savings schemes are fixed every quarter based on yields on government bonds. The sharp reduction is a result of the Reserve Bank of India cutting interest rates by 0.75 %, taking the repo rate to 4.4 percent.
So in effect the action taken by RBI to provide a monetary cushion to the coming Covid-19 recession has resulted in a reduction in the interest earnings of those who have money in sovereign deposit schemes. Even though each step of this chain of causes and their effects is logical, the end result is disastrous for those who depend on these schemes for post-retirement income. The reduction in the earnings of such people is enormous. What looks like a one percent drop in the interest rate could actually be a 15 per cent reduction in the income of the saver. For example, if you have a Rs 20 lakh deposit in the Monthly Income Account, you were getting an annual interest of Rs 1.52 lakh rupees. Now, this comes down to Rs 1.32 lakh, a reduction of 13 per cent. The worst impact is on a one-year term deposit, where the amount you earn has gone down by more than 20 per cent!
Even though the monetary policy logic of lowering these rates sounds fine, some special provision is needed in the current situation for small savings schemes, especially those for senior citizens and the girl child. These schemes have a specific social purpose and utility. The government spends a lot of money on a lot of things, many of them useless. A small extra outgo of interest on such schemes should be seen as a social expenditure rather than some great anomaly in the monetary policy being followed.
At this point of time, we are entering a period of great uncertainty. Governments - both states and center - will look after its own employees, with DAs and such flowing nicely and salaries getting bigger as they always do. In the private sector, many of those who are still in their working life will also cope, as the economy eventually recovers. People will earn less, face hardships but have a future to work for. None of this is true for retirees. They are out of the economy now. An economic recovery will not mean more earnings for them. In fact, in one way or another, it will mean higher costs for them. On the other hand, lower interest rates will mean lower income. Except for the prosperous few who may have some inflation-linked means of earning like rent or a pension, this is an accelerating crisis for them.
The process for handling the economic fallout has just begun. Even the inputs that will drive these measures are not in place yet so one can hardly predict what will happen. No doubt there will be many rounds of economic packages. There is no doubt that every country is looking at massively reduced tax revenues and increased government expenditure. This is uncharted territory for everyone. However, mechanically following set formulae for determining small savings interest rates should not be done. These interest payments are a key income source for a vulnerable section and the packages that are to come must keep that in mind.
