Centre to cut interest rates on small savings

In a jolt to the middle-class, the government is all set to lower small savings rates and align them with market interest rates from April 1.

The rates will be revised every quarter instead of the prevailing yearly basis. Rates on girl child and senior citizen small saving schemes will remain unchanged.

“The decisions have been taken and executive order and notification would be issued in a day or two. Broadly the underlying philosophy of small savings rate changes is to make the rate more frequently market aligned, make it as closely market aligned as possible,” said Economic Affairs Secretary Shaktikanta Das.

The new norms may allow banks to reduce their deposit rates and thereby the lending rates, but for small savers it will mean lesser return on public provident fund, term deposits and post office saving schemes.

The move, which may dissuade households from financial saving products, is estimated to save the exchequer less than Rs 5,000 crore per year. The announcement comes close on the heels of Finance Minister Arun Jaitley expressing concern that any radical cut in small saving schemes could hurt some sections of the society.

“We as an elected government have to look at it, in addition to the economic principle, with a tinge of political pragmatism because lots of people are dependent on it (small savings),” Jaitley had said at a media event in Delhi in December.

The measures comes in the wake of banks complaining that the transmission of monetary policy easing has not happened in full swing due to high rates on small savings.

They argue that high rates on small savings schemes run by the government make their fixed deposits uncompetitive and in turn does not allow them to reduce the cost of borrowing.

While banks are offering 7 to 8 per cent interest rate on a five-year fixed deposit of less than Rs 1 crore, small savings offer between 8.4 to 9.3 per cent.

This makes it difficult for banks to reduce deposit rates. The RBI has reduced policy interest rates by 125 basis points (bps) to a four-and-a-half-year low of 6.75 per cent, while banks have transmitted only up to 70 basis points in their base rate so far.

schemes    Rates after    Rates prior    maturity
                April 1, 2015    to April 1, 2015
PPF              8.70 %          8.70%    15 years
Senior citizen   9.30%        9.20%    5 years
saving scheme
NSC                8.80%         8.80%    10 years