Govt cuts interest rates on small-saving schemes

Dealing a severe blow to middle-income and the salaried class, the government on Friday sharply reduced interest rates on a number of small-saving schemes.

The steepest cut was effected on the Kisan Vikas Patra with its interest rate being lowered by close to 1%. The popular Public Provident Fund (PPF) saw more than half a percentage point cut.

After the latest cut, the interest rate on PPF has come down to 8.1% from the present 8.7%. On KVP, the rate has come down to 7.8% from the current 8.7%. The new rates will be applicable from April to June 30.

The government even tinkered with the girl child scheme (Sukanya Samridhi Yojana) by lowering interest rate by more than half a percentage point. In the Budget, Finance Minister Arun Jaitley had said that the government will not touch saving schemes for the girl child and senior citizens.

The five-year senior citizen savings scheme will now earn 8.6% interest compared to 9.3% at present.

Last month when the government cut interest rates on some small-saving schemes, it had left Sukanya Samriddhi Yojana, Senior Citizen Savings Scheme and the Monthly Income Scheme (MIS) untouched, saying they were linked to social security goals.

The five-year National Savings Certificates will now earn an interest rate of 8.1% as against 8.5% at present. The post office saving deposits were, however, left untouched.

The step has been taken in order to align interest on small savings with market rates. Accordingly, the rates will be re-adjusted on a quarterly basis.

The step also comes in the wake of the Reserve Bank of India (RBI) asking the government to cut interest rates on small savings so that the RBI rate cut is better transmitted by the banks.

“On the basis of the decisions of the government, interest rates for small savings schemes are to be notified on quarterly basis,” a finance ministry order said, while announcing the rates for the first quarter of fiscal 2016-17.

Clarifying on the latest interest-rate cut, Economic Affairs Secretary Shaktikanta Das said it is a normal process which is being followed from 2012-13.

“The government has done the interest rate re-set and re-calculated with the G-Sec rates of equal maturity. It is done every year in the month of March. There is nothing new except that earlier it was done on an yearly basis whereas now it is on quarterly basis,” Das added.