Chidambaram criticizes govt move to withdraw 7.75% taxable savings bonds; but should savers worry?

Former Finance Minister of India P Chidambaram criticized the government’s move to discontinue the popular RBI Bonds effective today, calling it a “cruel blow” to Indian citizens.

Chidambaram took to Twitter to say, “after lowering the interest rates in PPF and small savings instruments, the abolition of the RBI Bond is another cruel blow. All citizens must demand that the RBI Bond must be restored immediately.”

"The Government of India, hereby notifies that the 7.75 percent Savings (Taxable) Bonds, 2018...shall cease for subscription with effect from the close of banking business on Thursday, the 28th of May, 2020," said a government notification on Wednesday.

The Reserve Bank of India has also notified the cessation of 7.75 percent Savings (Taxable) Bonds, 2018.

The 7.75 percent Savings (Taxable) Bonds scheme was introduced in January of 2018 will be withdrawn from the close of the banking business today. For retail investors looking for steady returns with minimal risk, this was a popular scheme which assured a higher annual interest than what money in savings bank accounts, or even small savings schemes would typically earn. The interest on these bonds, popularly called RBI Bonds, was taxable.

While the government did not give a reason for withdrawing this scheme, this is not the first time that such an action has been taken. The 7.75 percent Savings Bonds were introduced in January 2018 shortly after the government had then withdrawn the earlier savings bonds scheme which offered subscriber 8 percent interest.

Chidambaram also referred to this in his tweets.

But should savers worry? The answer lies in what the government does next. Yes, the scheme offered higher safe returns than some of the other available saving schemes, but that is not to say there will not be a similar such scheme in the future, albeit with lower rates.

Indranil Pan, Chief Economist at IDFC First Bank told CNBC-TV18, “I guess it was mostly due to the relatively high-interest rate that this paper carried. Today the new 10-year paper is at around 5.75 percent, while this 7-year paper with sovereign risk carries 7.75 percent.”

He added, “I believe that the government will come out with a new instrument with a similar design but with a low-interest rate of around 6 percent- that will be anyways higher than bank fixed deposit offerings at this moment.”

Interest rates are on the decline in the economy, with Reserve Bank of India also lowering repo rates by 40 basis points recently to a historic low of 4 percent. State Bank of India, Kotak Mahindra Bank and other banks have already started cutting deposit rates for savers.

The government has also reduced interest rates on small savings schemes. For instance, the interest rate on PPF was cut from 7.9 percent to 7.1 percent per annum. The Senior Citizens Savings Scheme or SCSS was also cut from 8.6 percent to 7.4 percent per annum, and so on.

To sum up, savers can no longer expect to earn the same interest rates today, than they did even a few months back.

RK Gurumurthy, Treasury Head , Lakshmi Vilas Bank told CNBC-TV18, "With general decline in interest rates, the decision to stop subscriptions in 7.75 percent Savings Bond is a logical fallout. Inflation is expected to remain low therefore small savers will not be impacted, bank deposit rates have also sharply fallen. There's no better way to achieve rate transmission."

“All the small savings interest rates have been brought down, and this had to go. Rather, I don’t know why it wasn’t withdrawn earlier. When senior citizen special schemes like the one with LIC have lower interest rates, how can this scheme offer higher rates?” added Kamal Mahajan, head of Treasury and Global Markets at Bank of Baroda.

Experts believe the reason for withdrawing this scheme is also closely linked to cost considerations by the government at a time when it needs all the liquidity it can get.

“Collections under such instruments form ‘other liabilities’ of the government and the government will not be able to do away with receipts under such schemes in a year when there is a significant resource crunch,” Pan added.