In a bid to implement changes in the Government securities (G-Secs), the government panel, headed by Shyamala Gopinath, deputy governor, Reserve Bank of India, are holding talks on the issue of whether, all instruments falling under National Small Savings Scheme (NSSS), barring post office savings account deposits, should be linked to the market in a controlled manner or not.
The idea is to reduce the year-to-year volatility in administered rates. The committee has proposed a cap of 100 bps so that the rates don’t fall or increase beyond that limit even if the average yields from G-secs does.
The positive aspects:
The good news is that, talks are being held in order to propose a hike in the PPF limit of up to Rs 1 lakh. The committee has also proposed to do away with the Kisan Vikas Patra (KVP) since there are multiple products in the space and KVP only serves the thrift needs of small investors. For NSCs, two tenors of five and 10 years have been proposed, up from a single tenor of five years. In order to align the postal savings deposit rate to the bank savings deposit rate, which is 4% now, the committee has recommended increasing the rate of interest by 50 bps—from 3.5% to 4%.
Apart from retaining the tax edge, if these changes are applied, there is not going to be much change in the expected rate of return.
The negative aspects:
Most risk averse investors prefer saving in these instruments because they are risk free and provided regular returns. Conservative investors try to fulfill their financial responsibilities by avoiding any kind of debt by purchasing a home loan or a personal loan etc. and follow the systematic pattern of savings.
The thing that needs to be observed is that although the G-secs are not very volatile, there can be sharp rises and falls in the rate of return. If this happens then, there is no point of investing in these instruments by conservative investors, who are happy with the existing rate of returns and do not wish to go ahead and take risk. If these instruments become market linked, there is no point in having long lock-ins and yet bear the risk of the falling markets.