Savers With as Little as $1.5 Key to Modi Keeping Budget Promise

  • Small savings inflow seen at record 1 trillion rupees for FY18
  • Morgan Stanley calls it aggressive; DBS says it’s ambitious

Prime Minister Narendra Modi is relying on a record bounty from millions of savers contributing as little as $1.5 to keep to his government’s target for market borrowings next year. Morgan Stanley and Citigroup Inc. say he may be expecting too much.

The administration estimates small-savings plans will lure 904 billion rupees ($13.4 billion) in the current financial year, more than four times what was initially budgeted, and another 1 trillion rupees in the year starting April 1. Morgan Stanley calls the government’s target for next year is “aggressive” and projects collections will be half that amount.

Small-savings instruments such as post-office deposits and national savings certificates have become more attractive as lenders slashed interest rates on bank deposits after being flooded with excess cash due to the government’s surprise Nov. 8 currency recall. As strict withdrawal limits are eased and these funds move back into the economy, banks may look at raising deposit rates, thereby reducing the appeal of other savings avenues.

“The target has been set at an ambitious 1 trillion rupees,”  Radhika Rao, an economist at DBS Bank Ltd. in Singapore, wrote in an e-mailed response to questions. “Interest in small saving schemes is generally buoyant when returns on bank deposits are moderating. It transpired this year, but we are uncertain if there will be a repeat next year.”

The skepticism comes as Asia’s third-largest economy returns to normalcy after last year’s shock high-denomination currency note ban. Finance Minister Arun Jaitley said Wednesday that he expected any economic impact from demonetization to be transient.
The one-year deposit rate offered by State Bank of India, the nation’s largest lender, has been cut to a six-year low of 6.9 percent, while the annual rate of interest on national savings certificates is 8 percent.

“The budget estimates for 1 trillion rupees of funding through these schemes look aggressive, in our view, and could pose upside risks to market supply later in the fiscal year, if collections disappoint estimate,” Kritika Kashyap, a rates strategist at Morgan Stanley in Hong Kong, wrote in a Feb. 1 note. The bank had estimated funding through such plans at 500 billion rupees in the fiscal year 2018.

To read more on Modi’s optimistic budget targets, click here

The government has pegged net market borrowing at 4.23 trillion rupees for next year, similar to the 4.1 trillion it will borrow in the 12 months to March 31. It estimates the absolute fiscal deficit will rise to 5.46 trillion rupees from 5.34 trillion rupees. The 1-trillion rupee expected from small savings raises their share in funding the budget shortfall to 18.3 percent, almost double the proportion for the year ended March 2016, according to Bloomberg Intelligence.

“A higher interest differential between bank deposits and small saving rates encouraged the large build-up in small savings in FY17,” Citi economists wrote in a Feb. 2 note. “It remains to be seen whether this trend will continue in FY18 as well.”

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