At the end of the financial year, on March 31, 2021, a government circular was made public notifying the evolution of the interest rates of various small savings and that of contingency funds. There has been a drastic rate reduction among many plans. There was an outcry among opposition parties and the general public over the reduced rates. However, the decision was withdrawn the next day due to an oversight in the communication. While some have expressed that the ad has been withdrawn due to political constraints as several state elections are scheduled, some believe these could be temporary.

The past year has been extraordinary with the pandemic ravaging the population and the government imposing strict lockdowns to contain the spread of the virus. This had a negative impact on the economy. Before the pandemic, the Reserve Bank of India (RBI) cut interest rates and it cut 100 basis points in February and March 2020 itself. A further 40 basis point rate cut was announced in May 2020, taking policy rates to lows of nearly two decades.

The gradual opening up of the economy that followed initially reduced consumer demand as supply side bottlenecks continue. These imbalances have led to inflationary pressures. However, not to an alarming level but certainly beyond the comfort zone of a conventional setup. This is not a national trend, but a feature across countries as supply chains have struggled to meet growing demand.

In addition to the various government tax measures, RBI has been at the forefront of dealing with the fallout from the pandemic restrictions using numerous liquidity methods and also announcing a six-month moratorium on existing loans. The central bank was also involved in other activities to ensure sufficient liquidity in the banking system. The government, while announcing various PLI (Production Linked Incentives) programs in all sectors with the aim of stimulating recovery, also announced the blocking of IBC (Insolvency & Bankruptcy Code) procedures for one year.

The Union budget has clearly explained the increase in borrowing over the past year and the continued pursuit of aggressive fundraising this year. This has led market participants to alter market expectations for them with the spikes in yield. The RBI has been on several “turn of operations,” where it has tried to tame the yield curve to their desired levels by trading instruments at different times simultaneously. In this way, they tried to undermine the energy of market participants.

While demand has reached pre-covid levels in many sectors, supply has not caught up to this level resulting in some inflationary trend, especially among commodities etc. This global reflationary pressure raised market participants’ expectations for a better return than that offered, leading to the complete abandonment of new auctions by the RBI. What investors need to recognize is that lowering interest rates is not a new phenomenon, but has been happening for decades and is particularly evident over the past two decades. It’s part of the unraveling global deflationary trend and India is no exception. In addition, the change in accounting for loans (FCI from NSSF) has also put direct pressure on the government to shed light on the cost of financing. This limits the options for investors looking for this type of instrument in the fixed income space.

So what options are left out for those who depend on these types of titles? We could continue to invest in these with lower expectations in the years to come but by carrying the sovereign guarantee or an foray into other asset classes to obtain better returns. Of course, the choice to continue investing in PPFs or small savings plans is not universal and must be dealt with on a personal level. But it is certainly a red flag for young investors to have significant exposure to equities in their retirement portfolios.

The government has made multiple efforts for retail investors to have access to the debt market through offers like Bharat 22 ETF etc. run but with volatility. Also, returns are not taxed in the same way, but through capital gains. The older generation, however, must stick to traditional options despite lower returns.

(The author is co-founder of “Wealocity”, a wealth management company and can be contacted at [email protected])

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