Moving quickly to contain public outrage ahead of key state polls, Union Finance Minister Nirmala Sitharaman on Thursday Morning announced that the move by her ministry on March 31 late evening to slash rates of small savings schemes was an “oversight” and the previous rates will continue for April-June quarter.
“Interest rates of small savings schemes of GoI shall continue to be at the rates which existed in the last quarter of 2020-2021, ie, rates that prevailed as of March 2021. Orders issued by oversight shall be withdrawn. @FinMinIndia @PIB_India,” Sitharaman said in her Twitter handle.
The rate cut announcement and then the hurried recall is unique.
On March 31 late evening, the Finance Ministry had announced the lowering of interest rates on various small saving schemes such as National Saving Certificates (NSC) and Public Provident Fund (PPF) between 40 basis points and 110 basis points. The pay-out on PPF has now come down to a multi-decade low of 6.4 per cent. This would have hit fixed income investors, especially those in senior citizens group.
The new rates were said to come into effect from April 1 i.e. be valid till June 30. Contributions made on or after April 1 would have fetched a lower rate, while those made till March 31 would have got old rates. The small savings schemes basket comprises 12 instruments, including the National Saving Certificate (NSC), Public Provident Fund (PPF), Kisan Vikas Patra (KVP) and Sukanya Samriddhi Scheme. If the latest round of cuts held, interest rates on small savings schemes have been reduced by a full 110-250 basis points in financial year 2020-21.
As per the Finance Ministry announcement on March 31, with effect from April 1, 2021, Public Provident Fund (PPF) will fetch 6.4 per cent down from 7.1 per cent earlier, National Savings Certificate (NSC) will get you 5.9 per cent, down from 6.8 per cent earlier, Sukanya Samriddhi Yojana (SSY) will give you 6.9 per cent, down from 7.6 per cent earlier. Post office time deposit rates across tenures have been reduced and will earn between 4.4 per cent and 5.8 per cent compared to earlier range of 5.5 per cent to 6.7 per cent. Senior Citizen Savings Scheme will fetch 6.5 per cent, down from 7.4 per cent previously. Kisan Vikas Patra will fetch 6.2 per cent, down from 6.9 per cent earlier. Savings deposit rate will be 3.5 per cent, from 4 per cent earlier.
The government can revise the interest rate at the beginning of every quarter. Since 2016, interest-rate resetting has been done based on yields of government securities of the corresponding maturity, with some spread on the scheme for senior citizens, as advised by the Shyamala Gopinath Committee.
This was the second time the government had cut interest rates on small savings schemes in the past twelve months. In the April-June quarter of 2020-21, the government had slashed rates of small savings schemes by 70-140 basis points. 100 basis points/bps is equal to 1 per cent.
Tag: Finance Ministry
Finance Ministry asks SEBI to withdraw revised valuation norms for perpetual bonds
Markets regulator SEBI’s revised norms for valuing perpetual bonds like Additional Tier-1 (AT1) bonds has caused fears in markets. MFs hold about Rs 35,000 crore in AT1 bonds. While SEBI has asked mutual funds to treat maturity of perpetual bonds as 100 years compared to current practice of short-term instrument of similar tenure G-Sec, mutual funds say such a change will result in high mark to market loss, abrupt drop in NAVs, panic redemptions and overall corporate bond market being hit. So, the Finance Ministry has asked the SEBI to withdraw the revised perpetual bond valuation norms, as the clause on valuation is “disruptive in nature”.
Referring to the SEBI circular, which we have covered in detail here, the Finance Ministry said the revised norms ask funds to value AT1 bonds as 100 year bonds for which no benchmark exists.
“Mark to market (MTM) loss will be very high, effectively reducing them to near zero. The abrupt drop in valuation is likely to lead to large NAV swings and potential disruptions in debt markets as MFs will seek to sell those bonds anticipating investor redemptions, causing panic in debt markets. This measure will also take away appetite away from mutual funds for investing in such instruments given the valuation norms,” said a March 11 office memorandum from Finance Ministry addressed to SEBI chairman and Department of Economic Affairs secretary. The SEBI circular was disclosed on March 11.
The Finance Ministry also feared that panic redemptions by mutual funds would impact overall corporate bond market as MFs may resort to selling other bonds to raise liquidity in debt schemes. This could lead to higher borrowing cost for corporates at a time when the economic recovery is nascent, the Ministry said.Also, the Finance Ministry feared that capital raising by PSU banks from the market will be adversely impacted due to limited appetite from other investors. “This would lead to increased reliance on Government for capital raising by PSU banks as AT1 and Tier 2 would need to (be) replaced by core equity,” said the office memorandum referred above. Over the long run, for all banks, not just PSU banks, more equity dilution will take place, which will lead to depressed valuations.
“Considering the capital needs of banks going forward and the need to source the same from the capital markets, it is requested that the revised valuation norms to treat all perpetual bonds as 100 years tenor be withdrawn…,” it said.
Separately, AMFI in a statement released to media said that perpetual bonds or Additional Tier I Bonds are issued without any maturity date but are usually issued with call option(s) and qualify for Tier I capital. Banks have been majority issuers of Perpetual bonds. Perpetual Bond market is reasonably active with regular trades in Large and Higher rated issuances. Most trades in Perpetual Bonds happen on a yield to call basis. “This is based on the established market convention, locally as well as globally, that the issuer will exercise the call option on the due date,” AMFI said.
The statement said that the SEBI had engaged with Association of Mutual Funds in India (AMFI) on treatment of Perpetual Bonds as it is a hybrid instrument and carries a differentiated risk reward ratio than a normal debt instrument. Treatment of Perpetual Bonds was discussed in Mutual Fund Advisory Committee (MFAC) where several members of AMFI participated.
“AMFI fully supports the need and spirit of the circular in capping exposure to Perpetual bonds. Most of the mutual fund schemes are well below the cap specified in the circular. In few of the schemes where perpetual bond exposure is higher than the SEBI prescribed cap, grand fathering is kindly permitted by SEBI to ensure that there is no unnecessary market disruption,” the MF lobby said.
The above referred SEBI circular continues the tradition of the primacy of traded prices. Perpetual bond market sees active participation from various players viz. Banks, Corporates, Mutual Funds and Individual Investors. “Only in the event of lack of traded prices, the question arises as to whether the bond should be valued to call or to maturity. Given a reasonably active market with regular trades, the issue is narrower than it appears,” AMFI said.
