Impact of administered deposit rate on the link between short rate and long rate

Abstract

Small savings (consisting of Public Provident Fund, National Savings Certificate, Post Office Time Deposits, Post Office Monthly Income Scheme, Kisan Vikas Patra etc) constitute an important component of Indian public savings. Some of the tax, interest rates and liquidity profiles of these schemes are geared towards long-term investors with low risk profile, i.e. for the low-to-middle class with retirement benefits. In this report, we first start by explaining how small savings rates are set and how small savings are linked with government budgets, monetary policy and fiscal deficits. Next, we take a deeper look at different types of savings schemes and explore their advantages and disadvantages. As mentioned in the report, small savings interest rates are currently being set by the government, but there is a strong need to set these rates by benchmarking with other market-determined rates. So we analyze the views of some prominent committees (Y V Reddy Committee, Rakesh Mohan Committee and Thirteenth Financial Commission) on this topic. Lastly, we analyze the performance of 10 yr G-Sec yields, CPI (Industrial Workers) and RBI Bank Rate as possible benchmarks for setting the small savings rates.