Small Savings in Your Tomorrow's Portfolio

Now that small savings rates have been linked to government securities and has thus become market-linked, the role it plays in people's investment portfolio will change over time. Once you are not sure of what you will get at the end of the day as will be the case with long-term options such as Public Provident Fund, you will also start looking at the risk-return equation in fixed income investments unlike the past. Before, you could put money in a government-backed scheme with tax-breaks and chill out. Not any more. In fact, the small savings regime harks back to the very late 60's and early 70's when India desperately needed to mobilise savings, something that got a boost from the bank nationalisation in 1969. Now, that is not the case with people's incomes increasing much faster than expenses when you compare it with that period. As has always happened in case of other kinds of subsidies, the interest rate subsidy for small savings has gone mostly to people who least needed it. I have a PPF account. I am sure that a rural self-employed needs it more than me.  In fact, I should be barred from having an account. Maybe I should have fun till it lasts.

But coming back to the role of small savings in tomorrow's portfolio, if the Direct Taxes Code does what it should do i.e. reduce tax leakage routes, then people would only invest it to a limit as the overall portfolio returns will suffer. Being market linked, it will not be able to generate high returns at practically no risk since these investment options are government backed. People are likely to consider other options with equal or slightly higher risk. Unless mutual funds and other alternates make themselves available to people, something that should have been done long ago instead of banking on corporate money for their debt funds, we will see bank and corporate deposits getting more popular. Bonds will get more popular too. If you need proof, check out dicussions on people's portfolios in US and British personal finance books.   

Beyond RBI's Rate Hike

I was in All India Radio studios last evening again as an expert to comment on news developments. As luck would have it, RBI raised the interest rates for the 13th time yesterday and most of the anchors' questions moved around the event. While asnwering the questions, one or two interesting things struck me. Apart from the usual things that a rate hike typically does, such as raising the rates for retail loans and fixed income options, which this move will obviously do, there are a few other things that are possible. First, if things get real bad on the global economic front such as a deeper mess in Europe and the US and there is a credit squeeze in India with forex moving out and back, the RBI could reverse the rate regime as an emergency measure. The state of government finances is such that instead on the fiscal side, fire-fighting might have to be done on the monetary side. Second, it is now quite clear that corporate earnings  will suffer for some quarters. This means that in the absence of increasing revenues and profitability, companies will try to cut costs. First, future investments, travel, promotion and advertising. Then, manpower. During a Diwali party, some people told me the kind of job losses taking place in the telecom industry. Of course, bloodletting on the manpower front in mutual funds and insurance industry is now known to all. What a reversal of fortune? Maybe a case of "what goes up.......".