As the Reserve Bank of India moves deeper into its rate-cutting cycle, a familiar obstacle has resurfaced in the form of administered interest rates on small savings schemes that refuse to adjust in line with market signals. These rates, set by the government rather than discovered through markets, are increasingly incompatible with a liberalised interest rate regime.The problem is not new. Administered rates are structurally downward sticky. Although intended to track market yields and provide a spread of up to 100 basis points over comparable government securities, most small savings rates remain well above the levels implied by this formula.
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