NSS rates go up

In light of increase in profit rates on National Saving products, along with rollout of shorter tenure certificates, the current fiscal year started on a positive note for risk-averse, passive investors. In a move to lure investors, profit rates on various certificates and saving accounts have been raised by an average of 28 bps, effective from July 1. Profit rates on the most admired scheme: Behbood Saving Certificate, which accounts for around 23 percent of the saving scheme pie, inched up by 36 bps, to 14.64 percent. Outstanding NSS stock (including saving accounts, certificates, prize bonds, saving bonds and postal life insurance) summed to around Rs2.05 trillion at the end of May 2012, marking a net inflow of Rs160 billion during the first eleven months of FY11, as opposed to Rs209 billion during the corresponding period last year. The government has estimated total net inflows of Rs180 billion during FY12, outstripping the revised target amount of around Rs146 billion for the fiscal year by a far wide margin, but below the FY11 tally of net inflows at Rs 234 billion. However, the government is eyeing net inflows of Rs224 billion in FY13. The slacking growth in net inflows is symptomatic of decline in savings. Moreover in part, this is also down to net outflows of Rs 27 billion in March, 2012. "Owing to retirement of significant amount of debt owned by institutional investors in March, along with a ban on investments by institutional investors, the non-availability of rollover facility resulted in net outflows during the month", according to one government official, adding that the ban was later lifted in April. In the same breath, the governments borrowing burden on financial intermediaries has also increased during the past few months. This can be gauged from the fact that NSS stocks contribution in the total domestic debt stood around 27 percent on April 30, 2012, down from 30 percent and 34 percent at the end of FY11 and FY10, respectively. However, it is never too late to mend. Launch of the much-awaited shorter tenure certificates: three-month, six-month and 12-month to target small investors, with minimum investment amounts of Rs10,000 will help the government garner funds from non-inflationary borrowing window. And, it will also pave the way for channelling funds directly to the governments kitty thereby, reducing the borrowing pressure from other sources, primarily commercial banks which are minting money by thriving on low cost deposits pool. For investors, the drawing card is competitive profit rates, as interest rates on these shorter tenure certificates are benchmarked at 95 percent of T-bills with comparable maturity. The three-month, six-month and 12-month certificate will yield 11.28 percent, 11.34 percent and 11.40 percent, respectively. Higher returns on national savings certificates will also force private banks to offer better returns to their depositors which averaged just 5.88 percent in May 2012. At the current level, ratio of NSS stock as a percent of total deposits in scheduled banks is about 33 percent. NSS also intends to launch a Student Welfare Bond in Rs100 denominations by August this year.