Interest split favours Indian pensioners

Indians have no social safety net

Plans to boost the incomes of hard-pressed pensioners are delivering an unlikely boost to the Indian debt market.

A major structural hurdle for lower interest rates has been removed

Jayesh Mehta, DSP Merrill Lynch

Interest rates in the country are at a 29-year low of 6.25%, and the worldwide slowdown means the government would like to see them fall still lower to encourage borrowing and investment.

Many of India's retired population rely on savings because the country has no social safety net.

But this means the low rates are already cutting into old people's income, and inflation of 3.5% makes their situation more precarious.

So the government is now proposing that pensioners, the retired and the widowed should get their own rate, separated from interest rates in general.

Wide range of rates

Finance Minister Yaswant Singh told parliament that the differential rate would allow the country to cope better with the international economy, while protecting those who needed it.

"I hope... to correct (the rate situation) very soon, with a differential interest rate for both pensioners and senior citizens and widowers so that this kind of decline in interest rate does not affect them," he said.

The move could also shore up support for the ruling party among the elderly in the middle classes, the party's main backbone.

The government already maintains tight control over a wide range of varying rates.

Bank accounts already have to take into account not just the base rate but rates for such things as state retirement schemes.

Further cuts

The need to avoid undercutting public sector returns on retirement savings has prevented banks from cutting rates sharply.

But the connection suggested between interest rates and the age of savers could allow banks to pay less to younger customers.

The opportunity to offer different rates was warmly welcomed by financial markets, and the returns on government bonds fell.

Analysts glimpsed an opportunity for rates to fall further.

"A major structural hurdle for lower interest rates has been removed," said Jayesh Mehta, head of debt capital markets at DSP Merrill Lynch.

But BBC World Service World Business Report correspondent Chris Carnegy pointed out that lower rates of saving by the young could mean more spending, pushing up inflation.