So far in the current fiscal, interest rates have dropped by 250 basis points and profit rates on National Savings Schemes (NSS) have also been revised downwards accordingly. Despite the hefty reduction in profits, savers continue to stick to NSS, like bees on honey.
During 8MFY13, more than Rs288.96 billion have been parked in NSS by domestic savers; surpassing the annual target by Rs64 billion with months to spare!
Given that rates are dropping, yet deposits in NSS continuing to tower; are investors behaving irrationally?
Far from it. BR Research examined the month-on-month deposits to NSS with reference to the discount rate and inflation as measured by the Consumer Price Index (CPI).
That comparison highlighted that deposits into NSS have risen, whenever the gap between CPI and discount rate widened over past few months; thus offering depositors a higher real return. The jump is pronounced especially in the absence of other viable long-term saving alternatives. Moreover, the sovereign guarantee attached with NSS attracts the risk-averse investors of Pakistan.
However, there exist three anomalies to this core observation.
Firstly, in Jan-Feb, CY12, savings kept growing despite falling spreads.
During that period, the major chunk of growth was attributable to investments in prize bonds. As the profit rates on NSS dropped by up to 84 bps for the Jan-March quarter of 2012, investors inclined towards prize bonds that had witnessed the launch of a Rs25,000 denomination in February-2012.
Savings mobilized through interest bearing schemes kept heading south during the period, which finally entered the negative zone in March-2012.
To revive the investors interest, Central Directorate of National Savings (CDNS) raised profit rates on all the schemes effective from April 1, 2012, despite the fact that no hike in discount rate was in sight until the end of the fiscal year.
During the same month, the Federal Government allowed public sector corporations and institutions to invest in National Savings Schemes, which was barred in April 2011. This encouraged trusts, pension funds, provident funds and other institutions to seek refuge in NSS, offering at least double rates than banks do.
The second and third anomalous growths in NSS deposits were seen in May 2012 and August 2012. Expectations of a significant reduction in the discount rate pulled savers towards NSS, especially those products under the CDNS portfolio that allow savers to lock in rates for upto a year.
A glance at the others header reported in SBP data offers vindication for this contention, as deposits in Behbood and other certificates, shielded against downward rate revisions went through the roof in the corresponding period.
Going forward, with interest rates likely to rebound from Jun-2013 ahead of IMF programme and CPI also likely to rebound in FY14 on the heels of weakening rupee-dollar exchange rate and a possible increase in international oil prices that will spill over on power tariffs, fuel prices and other CPI heads, participation in NSS will depend on how profit rates on NSS and real interest rates take shape.
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