Small savings, small mercies

The government has done well to increase the rates of interest on small savings schemes, though marginally, after reducing them periodically for over three years. The rate increases of about 20-50 basis points payable on post office schemes will be effective for the October-December quarter. However, the interest rate on post office savings account has not changed. Short-term deposits will get an interest rate hike of 0.3% and special schemes like the post office monthly income scheme, Kisan Vikas Patra, National Savings Certificates and Public Provident Fund will be entitled to a higher hike of 0.4%. The Senior Citizens’ Savings Scheme (SCSS) will see a still higher rate hike of 0.5%. Some of these are popular schemes, and they are useful as investment plans and tax saving instruments. The continuous fall in returns from them had hurt many, like retired people and those in the lower income brackets, because some of them had provided fairly stable, dependable and regular income.

The interest rates of small savings schemes have been benchmarked to yields on government bonds. They are usually revised on a quarterly basis. But there was no revision in the last two quarters and the rates were actually reduced in the previous quarter. Overall, the rates have declined over the long term. Bank deposit rates have started moving up slowly in the last one year. But after the latest revision, post office term deposits offer better returns than banks for deposits of durations ranging from one year to five years. This may force banks to increase their rates on deposits. Saving habits and methods of savings have been changing in the country. The Reserve Bank of India has noted that in the last financial year, incremental bank deposits have declined and cash holdings of people have doubled. Low interest rates may be one reason for people keeping their savings in the form of currency. Higher interest rates may now prompt many to shift their savings to post offices or banks. This is good for them and for the financial system.

There is a view that the increase could have been higher. It is pointed out that the interest rate hike has not kept pace with the repo rate hikes. It could also have been made earlier. It is perhaps because elections are going to be held soon that some increase has been effected. It is unlikely that they will be reduced before the elections. The government should encourage people to improve their savings habit and give special attention to small savings deposits. They are more inclusive and can benefit common people more than bank deposits.