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-Rajeev Kumar (Editor-in-chief)

Friday, April 2, 2021

Let inflation-indexed bonds fix oversight (The Economic Times)

Quick takes, analyses and macro-level views on all contemporary economic, financial and political events.


The government was wise to hastily withdraw the order slashing interest rates on assorted small savings schemes, not so wise to have announced such rate cuts during vital state polls. The government tweeted that the orders (read: to cut interest rates) were issued by ‘oversight’. Elections are underway in five crucial states, inflation is rising, and the country is facing the second wave of the pandemic that has hurt incomes and livelihoods. A crucial policy decision on cutting the administered interest rates on small savings ought to have been thought through and not the subject of any oversight.


The interest rate on small savings is benchmarked to the yield on 10-year g-secs, that is around 6.17% now. But the revised rates on five-year post office fixed deposits (5.8%) and National Savings Certificate (5.9%) that have now been withdrawn were lower than what this benchmark would have warranted. This is absurd. Higher inflation would also lead to negative real return for investors, hurting small savers further, many of whom depend on income from investments. Most bank fixed deposits too offer only about 6% or so for senior citizens. Where will scores of small savers and pensioners, whose returns have dipped over the years, invest?


The best way the government can help them is to launch inflation-indexed bonds that protect both the principal amount and the interest from the harsh effect of inflation. This makes sense as the appetite for risk in this segment to invest in equity is low, and some savings can be invested in bonds. Preserving the value of the principal and offering a positive rate of interest in real terms, after netting out the rate of inflation, will be a decent savings option for savers.

Courtesy - The Economic Times.

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Help Sampadkiya Team in maintaining this website

इस वेबसाइट को जारी रखने में यथायोग्य मदद करें -

-Rajeev Kumar (Editor-in-chief, Sampadkiya.com)

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