The finance ministry on Friday raised by up to 110 basis points interest rates on most small savings schemes which don’t extend tax benefits to investors for the March quarter. However, it kept the rates unchanged on deposits under the popular schemes with tax benefits – public provident fund scheme and the Sukanya Samriddhi Yojana – at 7.1% and 7.6%, respectively, for the January-March period.
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While the hike on most small savings rates was widely anticipated in a rising interest rate scenario, some analysts had expected it to be more substantial, given the elevated inflation. But that would also have raised the government’s interest outgo further at a time when its finances are already strained in the wake of the Ukraine war — a scenario the Centre wanted to avoid.
This is the second straight quarter of a hike in interest rates for select schemes. The government had earlier raised the rates for the December quarter after a gap of nine quarters. Of course, as bankers had been saying, the small savings rates were kept at elevated levels for long, especially after the pandemic, even when the central bank had repeatedly cut key policy rates. The small savings rates are typically reviewed every quarter.
The latest move is in sync with the rising yields on government securities. The government seems to be confident that even without raising the rates for two popular schemes, it can ensure decent inflows of funds into the National Small Savings Fund (NSSF) for its use.
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The Centre has already declared a cut of Rs 10,000 crore in its FY23 gross market borrowing plan, which may increase its reliance on the NSSF to finance a part of its FY23 fiscal deficit. The government has budgeted its offtake from the NSSF to drop to Rs 4.25 trillion in FY23 from a record Rs 5.92 trillion in FY22.
The interest rates have been hiked by 110 basis points for the March quarter on time deposits for one year, two years and three years to 6.6%, 6.8% and 6.9%, respectively. The rate has been raised by 30 basis points on time deposits for five years to 7%. The rates on the senior citizen savings scheme and on the monthly income account scheme have been raised by 40 basis points to 8% and 7.1%, respectively. Kisan Vikas Patra will fetch 7.2% (with maturity after 120 months), against 7% (maturity after 123 months).
Last fiscal, the Centre was forced to reverse swiftly a proposed cut in interest rates on small savings schemes, ostensibly not to upset middle-class voters amid Assembly polls in states like West Bengal and Assam. The Reserve Bank of India has already raised the repo rate by 225 basis points since May to 6.25% to tame inflation. This prompted banks to increase their deposit rates to woo investors. While retail inflation hit an 11-month low of 5.88% in November, having dropped to the comfortable limit of the central bank after a gap of 10 months, it still remains elevated. This will continue to influence interest rates. Of course, with the tightening of interest rates by key central banks and slowdown in global economic growth, inflation is expected to decelerate in the coming quarters. However, the outlook still remains hazy and hinges, to a great extent, on how the Ukraine conflict pans out.