But there has been collateral damages due to this move. Those dependent on the interest from their investments have been affected as they find that they get much less for their investment now. They have understood the perils of reinvestment risk now! This is compounded by the fact that inflation has been higher than the tolerance limits set by RBI, which is up to 6%.
The retail inflation prints in October & November 2020 have been 7.6% & 6.9% respectively, primarily due to food inflation. This has ensured that investors are getting close to nil real returns or even negative real returns. This is a problem especially for the senior citizens who are dependent on income from their investments.
Many of them have invested in Senior Citizens Savings Scheme (SCSS), Pradhan Mantri Vaya Vandana Yojana (10 year Pension scheme) etc. and are getting regular returns from that investment. Every individual can invest up to Rs 15 Lakhs in each scheme, meaning Rs 30 Lakhs in all. The monthly returns earlier used to be the equivalent of Rs 20,000 pm for a Rs 30 Lakh investment.
If there is a spouse and s/he can also invest up to the limit, that is another Rs 30 lakhs of investment. So if such investments had been done in the past and that income is coming in, they will not be affected. Also, if they have a pension coming in, it does not affect them.
However, everyone is not in that place. Many have also been living on rental income that had suddenly stopped coming — either the tenant vacated, or stayed on but did not pay. Either way, the outcome is adverse.
There are other safe avenues for investment, although the returns that one can get today are muted. We have a five-year post-office term deposit which is today offering 6.7%. Kisan Vikas Patra is offering 6.9%, though one may not be able to get regular income from here. Post office Monthly Income Scheme offers 6.6% annual returns, paid monthly.
Most Bank FDs (from sound & reliable banks) are offering about 6% or just over that, for seniors. Corporate FDs from highly-rated corporates are offering about 0.5% more per annum. Bank Bonds and good quality NCDs are also available in the secondary market, that can offer 6.5% to 8% pa interest. However, these are typically available in lots of Rs.10 Lakhs or more.
Senior citizens may also consider the option of buying debt mutual funds of shorter tenures, good underlying paper quality & an accrual strategy ( buy and hold to maturity). While they may offer returns today in line with what is available for safe investment options, the fund manager has the option of bringing in higher yield papers when available. Also, the fund manager has access to papers that are not available to the public. In short, they could manage the debt portions well, in line with the developments, going forward.
Everyone has been put through the wringer during this pandemic. There are certain industries that have been affected very badly — like airlines, tourism, hotels & restaurants etc. They may take another six months or even a year to come back to normalcy. There are low-skilled workers in various sectors, like in construction, who have lost their livelihood.
Hence, this is a traumatic & turbulent period for everyone — not just senior citizens. The Government hence is doing what is good for people overall, which is how it should be.
Still, there is a case to be made for senior citizens, who have contributed to the economy throughout their working lives and need some consideration in the autumn of their lives. However, everyone among seniors may not need succour.
The government should provide relief to the needy among them with clear targeting. The Finance minister can provide upto an extra 1% pa in specific government schemes for senior citizens, who are not covered by government pensions and do not have taxable incomes. This relief can be for a limited period of a year, till the situation normalises.
Seniors need a leg up at this point. This is something that our Finance Minister can easily accommodate in the upcoming budget. Let us hope she does.