The shrinking rupee of elders
Monetary Policy Committee,India’s financial newbie, issued its inaugural Repo Rate ‘stamp’ at a discount of 0.25%.Banks can now borrow from RBI at 6.25%. Means cheaper loans and that always makes FICCI rub its hands in glee. And FM finally has his way with RBI as Urjit Patel delivers. All hunky dory ,save in one corner-the elders .For them the fine print is too black and gloomy.
Let's see why. First,the rate cut is prefaced by paring of interest rates on all small savings ,understandably, to facilitate easier transmission of the widely expected RBI rate cut by banks. And secondly, RBI upped its inflation target .Together ,it delivered a double whammy to elders.
As repo and small savings rates are now reset quarterly,it is more than likely that these two set of rates will move in tandem and arguably,downwards. Among all the multitudinous factors that impel private investment ,FM feels interest rate is prime. Mr Rajan thought otherwise and had to make way for Urjit Patel. In a nutshell ,FM and RBI ,in the foreseeable future,will manipulate interest rate downwards to kickstart private investment,an elephant hitherto impervious to all enticements.
Going forward, the scenario of government snipping small savings rates ,anticipating repo rate cuts ,that in turn setting in train across the board slide in deposit rates ,will be repeatedly played out. That's what an elder stares at today-a regimen of progressively dipping interest rates giving diminishing returns on his fixed savings and rising expenses including the most inelastic of it all - medical expenses. And there is no insurance against loss of income. A forward interest rate cover in the retail market is yet to be conceived and even if one had existed it would have come at an additional cost. The dread of difficult times for elders is truly real.
Lest I seem alarmist here are some facts:
Scheme PPF. MIS. KVP SBI(5yr).Senior.Inflation PPF(Real)
Q3FY16. 8.0. 7.7 7.7 7.25 8.5 6.0 2.0
Q3FY15. 8.7 8.4 8.7 7.25 9.3 5.88 2.82
Q3FY14. 8.8 8.4 8.7 8.75 9.2 6.37 2.43
The last column factors in inflation for illustrative purposes. It clearly shows the lower trajectory of real interest rates in some of the popular saving avenues of elders.For schemes other than PPF, the return gets further reduced by the applied tax rate.
To put things in perspective, consider medical insurance. That's one investment no elder can avoid.A senior citizen stepping into his 66th year will find his medical insurance premium payable to New India Insurance Co jump from ₹3850 per lac to ₹4250. Against a real income of 2% derived from PPF deposit, his medi-insurance premium would rise more than 10%.He will need to clip some expenses to rebalance his budget .There are other nibbles too into his static income. For instance,interest on small savings is now compounded annually,not half yearly. Senior citizen savings
scheme has no compounding at all though it pays interest quarterly.
Secondly, RBI revised upwards its inflation target to 5.3% for 2017 and 4.5 % for 2018 from 5% and 4% respectively. A higher inflation paring purchasing capacity of a declining interest income is a none too edifying spectre .On top of it is the irreversible attenuation of traditional support systems of
family and progenies for its elders .With any loss of income his financial insecurities get magnified.
Behind these financial changes is an ideological shift permeating the administration- edging away from a social economy to a market economy, the natural corollary of it is a market determined interest rate notwithstanding any social imperatives. Accordingly, now interest rates on small savings have been linked to yields on g-secs of comparable maturity with a small mark-up ,100 basis points for Senior Citizen and 25 basis points each for Monthly Interest Scheme ,KVP ,PPF. Though government promised in Feb 2016 to insulate Senior Citizen Savings Scheme from this formulaic determination,it eventually dropped this scheme in the same basket as other small savings schemes.
Besides tracking their own health,state now requires them to chart the bond market as well, the one market most elders never bonded with even in their prime. By all means too onerous a task. Bond markets are known to move by more parameters than just the repo rate and Inflation. One expert
opines, “70% of the variation (in bond interest rates) is caused by a variety of factors (other than repo and inflation)– each stepping in and out in short phases”. Even exchange rate fluctuations and Fed taper send domestic markets in a tizzy .Living in a globalised,interdependent world impliesanything ,anywhere affects all things.
Even if the 10 cr strong body of senior citizens guesstimate interest rates ,what then ? May be ,forewarned they will cut corners early enough to prevent dipping into their principal savings. On an unsupplemented ,non-expansive saving even cutting corners is too much of an ask. In the twilight years ,re-employment or self employment (except perhaps the eminently satisfying sinecure of tending young grand children) is not really an option.Thus most elders survive just on income from existing savings.
So as the nation continues with its experimentation with a market centric political economy two issues will occupy centre stage.Interest rates will be market determined. Further, ideological orientation will constrain the state from doling out much to unproductive labourers (in a market economy,doles and subsidies are reckoned povertarian and sinful) .Yet I venture to ask ,should the returns on savings of elders be buffeted by market tides? Should his survival depend on the vagaries of market or be insulated
from it ? That’s the fundamental poser.
I believe protecting the purchasing value of his income is enjoined upon the state, a constitutional obligation to protect the right to life of citizens including its elders. As markets only protect producers and entrepreneurs,the state should not trust its market to take care of elders.The least it can do is not to diminish what the elders already have- the income from their savings accumulated in the times when they sold their labour's to the nation.
Therefore, to check progressive immiseration of senior citizen,government should consider the following suggestions ,in the least .
1. The Senior Citizen Savings Scheme needs to be god-fathered by the state to make it the mainstay of its benefactions for elders’ financial security. And the best way to do it is to index interest rate to Consumer Price Index so as to give a real return of 5%.
2. Senior citizen need to be exempted from penalties for premature withdrawal for all schemes.They are the ones most likely to be confronted with unforeseen expenditures at most unpredictable times. Mind you, the penalties are not insubstantial -1.5% of the balance in senior citizen
scheme, 1% reduction in interest rate on all deposits in PPF. Some banks still charge a penalty of 1% on premature FD encashment under some conditions.
3. The 50 basis point differential interest on bank deposits which senior citizens once enjoyed , has whittled down to just 25 basis points. Instead of moving down, it should move up.
