Low rates make NSS less attractive

With interest rates on a downward trend, it is time for investors to wake up and smell the coffee! Lower than expected inflation figures in August and the strength displayed by the current account have built a strong case for another reduction in the discount rate in the upcoming monetary policy. In fact, there is growing consensus that the central bank will drop the policy rate by 50-100bps on October 8, 2011. The interest rate disquiet has also followed down to the National Saving Scheme products, as the government has lowered profit rates on these products, effective from October 1, for the first time since January 2011. The decision appears to have been dictated by the Ministry of Finance in anticipation of lower interest rates so that the government may slash fiscal debt servicing costs. This created a stir in the secondary bond market on Friday, resulting in a drop in PKRV on the 10-year government paper from 13.02 percent to 12.81 percent. However, at the local stock market, the KSE-100 index, reacted positively, finishing 1 percent higher on Friday, largely spurred by expectations that the decline in profit rates of risk-free vehicles will increase appetite for equity securities. Historically, participation in NSS remained soft during periods of low interest rates, depicting that growth in NSS stocks might slow down in the months ahead. But given that the government has set a lower mobilisation target for FY12, around Rs.186 billion versus last years revised target of Rs.223 billion; it is quite likely that additional flows in NSS will reach close to the target level. In light of a higher interest rate level during the last fiscal year, the NSS products garnered Rs.235 billion in net receipts in FY11-a notch above the revised target level. Hence, the total outstanding amount in NSS reached Rs.1,888 billion at the end of FY11. Monetary loosening will likely create pressure on institutional investors to shift money from government securities, such as T-bills and PIBs, to risky investments for higher returns. But, since it is difficult for individual investors to monitor risk, investments in NSS will likely to remain unscathed from rate decline. Even, at this level, profit rates on NSS products are still higher compared to deposit rates in banks. So, it comes as no surprise that NSS stock as a percent of total deposits in all scheduled banks stood at 33 percent at the end of June 2011. However, to further improve this ratio, there is a need to improve the quality of service imparted to depositors at NSS centres to levels comparable to commercial banks. Secondly, the Central Directorate of National Saving should also incorporate use of technology in its existing infrastructure to expand its reach and to lower its cost of operations.