Finance Minister Jaswant Singh is likely to lower rates on large state-run savings schemes by at least 50 basis points when he unveils the budget on Friday, analysts and officials said.
In a year when nine states go to the polls, the move is likely to be unpopular with India's large middle-class voters, the main investors in long-term pension funds to medium-term savings, but the cash-strapped government may have few options.
"There is likely to be a downward movement in some of these schemes which still offer high rates," a senior finance ministry official, who did not wish to be identified, told Reuters. He declined to elaborate.
A senior banker, who spoke on condition of anonymity, said he expected the government to bring down the rates on those schemes which are offering 9.0-9.5 per cent.
"The rest are unlikely to be touched," he said.
The rates on some other schemes are as low as 3.5 per cent, but the average interest cost was 11.36 per cent on the 2.6 trillion rupees outstanding in such savings schemes at the end of March 2002, according to the central bank.
In comparison, yields on 10-year government bonds have fallen nearly 70 basis points since the start of the financial year to 6.67 per cent, while the 15-year yield dropped 40 basis points to 7.08 per cent.
Rates on long-term bank deposits, which compete with the state savings schemes, dropped by 0.75-1.0 percentage point to six percent over the past year.
The benchmark bank rate is at a 29-year low of 6.25 per cent.
In a review of the economy in December, Singh said interest rates on the savings schemes needed to be revised in line with prevailing rates in the broader market.
"I expect them to lower the rates by at least 50 basis points to remove the distortion as overall interest rates have declined since last year," said Saumitra Chaudhuri, economic adviser with credit rating agency ICRA Ltd.
Analysts say the reduction will be tempered by rising inflation which topped five percent in the week to February 8, the highest in the current fiscal year to March.
"There could be a 50-to-100 basis point cut in the savings rates at the higher end of the spectrum," said M R Madhavan, strategist at Bank of America.
Last year, a 0.5 percentage point rate cut on the savings schemes triggered a political uproar and was seen alienating large middle-class support base of the ruling Bharatiya Janata Party.
