Govt rolls back small savings schemes rate cut

By: |
April 2, 2021 4:45 AM

Similarly, depositors get 7.4% under the senior citizen savings scheme, 143 basis-point higher than the five-year G-sec yield on Wednesday.

Elevated costs of small savings funds not just dent the exchequer but also force banks to refrain from trimming their deposit rates beyond a point.Elevated costs of small savings funds not just dent the exchequer but also force banks to refrain from trimming their deposit rates beyond a point.

The Centre’s swift reversal of a proposed cut in interest rates on small savings schemes, ostensibly to not upset middle-class voters amid Assembly polls in some crucial states, will keep its costs of funds elevated. The difference between the usually-higher small savings rates and yields on comparable government securities will remain high, thanks to the rollback.

Elevated costs of small savings funds not just dent the exchequer but also force banks to refrain from trimming their deposit rates beyond a point. Consequently, lenders are reluctant to effectively pass on the benefits of monetary transmission to borrowers, even though the Covid-hit economy needs a massive credit push to get back on its feet fast.

At 175 basis points, the gap in the interest rate is already the highest in case of time deposits for one year. While the rate on one-year deposit is as high as 5.5%, the yield on one-year G-secs closed at 3.75% on Wednesday.

The two-year and five-year time deposits fetch as much as 5.5% and 6.7%, respectively, while the yields on G-secs with the same tenure stood at 4.67% and 5.97% on Wednesday.

Similarly, depositors get 7.4% under the senior citizen savings scheme, 143 basis-point higher than the five-year G-sec yield on Wednesday.

The cuts in small savings rates, announced last evening, were rolled back on Thursday, when Bengal and Assam voted in the second phase of Assembly elections. The reduction in such rates could have potentially hit millions of middle-class depositors.

Finance minister Nirmala Sitharaman tweeted: “Interest rates of small savings schemes of government of India shall continue to be at the rates which existed in the last quarter of 2020-2021, ie, rates that prevailed as of March 2021. Orders issued by oversight shall be withdrawn.”

With the rollback, the government has kept small savings rates unchanged for a fourth straight quarter through June, despite low repo rate of 4% and abundant liquidity in the banking system. The idea was to encourage investors to park more funds in such small schemes, which can be tapped for funding a part of the Centre’s high fiscal deficit at a time when the pandemic has hit its revenue collections.

The government had last cut the small savings rates (in the range of 70-140 basis points) in the first quarter of FY21. These rates are revised quarterly.

The interest rates on Public Provident Fund (PPF), Kisan Vikas Patra (KVP) Scheme and the Sukanya Samriddhi Account Scheme have now been retained at 7.1%, 6.9% and 7.6%, respectively, for the April-June period of this fiscal.

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