The slide in bond yields post the February 22 high level of 7.780% serves as a perfect case for another cut in interest rates of small savings schemes but it seems higher inflation expectations in the second half of current year and political compulsions could lead to a status quo in the second quarter of current fiscal.Since February 22, government bond yields fell 65 basis points to 7.127 level on April 5, 2018.
Currently, the yield on the 10-year govt bonds stands at 7.465 percent.
Interest rate on small savings schemes including NSC, PPF, Sukanya Samriddhi Account and Kisan Vikas Patra (KVP) is linked to the yields of government bonds.
If bond yields rise, the government usually raises the interest rate on small savings schemes and vice versa.
For the first quarter of the fiscal, the government kept the interest rates on small savings schemes unchanged.
Currently, investments in public provident fund (PPF) scheme continue to fetch an annual interest rate of 7.6 per cent, the same as five-year National Savings Certificate (NSC) .
Kisan Vikas Patra (KVP) investments continue to fetch 7.3 per cent returns.
The one for girl child savings, Sukanya Samriddhi Account Scheme, gives out 8.3 per cent annually while it is the same as 8.3 per cent for the 5-year Senior Citizens Savings Scheme.
The savings deposits attract 4% interest rate.
Mayuresh Joshi, fund manager at Angel Broking said, "With the 10-year bond yields again falling by about 60 bps, the question is if it will lead to a cut in small savings rate. That looks unlikely for three reasons.
The fall in yields was a function of 2 factors viz the H1 borrowing program being lower by 23% and the dovish tone of the monetary policy. Both are subject to change if macros demand. Secondly, the 60 bps fall in bond yields comes in the backdrop of 140 bps rise in yields in last 7 months. Hence yields are still higher on a Y-O-Y basis. Thirdly, cutting the small savings rate would be a politically sensitive decision if you consider that these small savings rates have been cut in the last few years.
The more likely scenario is that these small savings instruments may lose some of their tax benefits."
During the first monetary policy of this fiscal, the Reserve Bank of India (RBI) on April 5 lowered retail inflation target for the first half of current fiscal to 4.7-5.1% on sharp moderation in food price rise and likelihood of a normal monsoon.
Deepak Jasani, head, retail research at HDFC Securities said, "Though the yield on GSecs rose till March 26, they fell on March 27 by 29 bps to 7.33% (vs 7.32% on Dec 29) as the government on March 26 announced plans to borrow a lower amount from the bond market in the first half of the next financial year, introduction of inflation-linked bonds and new benchmark bonds of 2-year and 5-year maturity to meet the market demand. For the next quarter going by the current trends, it could be flat unless we see a sharp move either way driven by local or global factors."
The government on March 26 fixed its borrowing target for the first half of the next fiscal (April-September period of 2018-19) at Rs 2.88 lakh crore. The amount was much lower than the Rs 3.72 lakh crore it had borrowed in the first half of 2017-18.
"The interest rates on small savings schemes may not be cut for the next quarter as inflation is likely to resurrect in H2CY18 and hence interest rates too may harden in that period," Jasani added.
The government cut interest rates on small savings schemes, including NSC and PPF, by 0.2 percentage point for the January-March period from the rates applicable in the previous quarter. Investments in the five-year Senior Citizens Savings Scheme were retained at 8.3 per cent. The interest rate on the senior citizens' scheme is paid quarterly.
Off late, bond yields have become volatile and have added to worries of bond traders and investors.
Vijayananda Prabhu U, chief manager, investment advisory services at Geojit Financial said, "Yields have been really volatile owing to good and bad news hitting market from all sides. If the net sell off by state lenders pulled the rates down, the greater access to sovereign market for foreign investors has added life to yields off late. Looking at the current rate trajectory, considering the dovish borrowing stance in H1, interest rates are expected to remain at current levels. A rate cut would probably discourage investments."