KARACHI - The fresh move by the government of increasing profit rates on Central Directorate National Saving (CDNS) products by 170-240 bps to above 18 per cent in a bid to finance fiscal deficit would hurt the banking sector's deposit growth in the current and next calendar years (2008-09) despite offering attractive returns on various deposit schemes by the banks. It has been learnt that the recent hike in the NSS rates would also increase the opportunity cost of investment in the stock market especially in the high dividend yield stocks like Hubco, FFC, PPL and OGC etc. as stock markets globally have witnessed huge falls forcing investors to look for safer heavens. The local stock market scenario is no different, even though the price freeze has restricted the fall in index since Aug 27, 2008, 25-30% discount in the off market reflects the risk attached to equity investment at present. The Central Directorate of National Savings has increased profit rates on national saving schemes (NSS) for the second time in 2 months as government attempts to move away from inflationary borrowings through central bank to non-inflationary instruments such as NSS. According to the details released, yields have been increased in a range of 170-240bps from 15% on major NSS products excluding once famous 10-year DSC (Defence Saving Certificates) whose rates would be revised at a later date however, currently it stands at the rate of 12.2 per cent. This was all the more imperative given the fact that government has set itself an ambitious target of Rs150bn net deposits from NSS in FY09, nearly twice the amount of Rs81bn received in FY08. The CDNS in its handout also showed that the return on Regular Income Scheme (RIS) has increased by 1.7% to 15%, yield on Special Saving Certificate (SSC) raised by 2.4% to 15.2% while Pensioners Benefit Accounts (PBAs) hiked by 1.8% to 16.8% and Behbud Saving Certificate (BSC) surged by 1.8% to 16.8% respectively. Frahan Rizvi, Research Analyst at JS Global assumes 4 pc and 6 pc banks' deposit growth in 2008 and 2009, respectively, compared with a CAGR of 18% in the last 5 years (2003-07). He also maintained the view that the increase in NSS rates would make the saving schemes more attractive for individuals and those institutions that are allowed to invest in NSS. Thus, this would put some degree of pressure on bank sector deposits which are already seen a difficult time recently falling by 4% in the last 5-months. "Though banks are already offering attractive return of around 12-15% on various schemes, there would be pressure to increase returns further especially as NSS schemes would see crowding out already limited liquidity in the local economy", he said. A vital component of the monetary tightening regime and the IMF agreement has been government's commitment to stop borrowing from the central bank which is highly inflationary. The government has already borrowed Rs376bn in FY09 as of Nov 15, 2008 in order to meet its budgetary requirement after running high budget deficits on accounts of subsidies. It is believed that, the 170-240bs increase in profit rates of NSS schemes to 15.0-16.8% (excluding DSCs) would help government attract additional deposits and reduce its reliance on SBP borrowings to finance budgetary deficits going forward. This is even more significant given the Rs150bn target set for FY09 and a dismal performance in 1Q (Jul-Sep) FY09, when net NSS collection drop by 7% to Rs21bn. In addition to increase in NSS rates, the official release of fiscal deficit figures for 1QFY09, according to which fiscal deficit eased considerably to Rs139bn (1% of GDP) as against fiscal deficit of Rs158bn (1.6% of GDP) in 1QFY08. While these numbers look encouraging, they are a bit misleading as the reduction in fiscal deficit was mainly led by a 69% cut in development expenditure to Rs39bn in 1QFY09 as against expenditure of Rs128bn recorded in 1QFY08.