The government is unlikely to raise small savings rates for the coming quarter when they are reviewed on Thursday, even though yields on government securities have hardened, a top official indicated, noting that the rates have not been cut for two financial years now.
Small savings rates had been last slashed in the range of 0.5% to 1.4% on different instruments in 2020, bringing the PPF rate to 7.1% from 7.9% prevalent till March 31, 2020. Rate cuts ranging from 0.4 to 1.1 percentage points, were also announced last March, but were rolled back within hours, citing an ‘oversight’ in the middle of the West Bengal assembly election campaign.
The interest rate on small savings instruments is reset every quarter, based on market yields on government securities (G-sec) with a lag, at a spread ranging from 0 to 100 basis points over and above yields of comparable maturities. The yield on the 10-year benchmark G-sec hardened to 6.86% on March 11 this year from a low of 6.6% on February 18.
“Since rates were not reduced all this time, I don’t see an immediate possibility of them being raised,” a senior Finance Ministry official told The Hindu. Reducing rates may also be tricky as yields on G-secs have gone up, he noted.
The Reserve Bank of India noted this month that existing rates of interest on small savings need to be reduced in the range of 9-118 basis points (or 0.09 to 1.18 percentage points) for the first quarter of 2022-23 to align them with the formula-based rates. In January, this differential between the extant small savings rates and the rates determined by the formula stood in the range of 0.42 to 1.68 percentage points.
Reacting to RBI’s call for paring small savings rates, the official stressed that interest rate discussions often get too focussed on borrowers’ needs. “The Government of India also wants to protect savers and senior citizens, for whom a fixed income is critical, so a rise in yields is not necessarily bad for those segments of the economy,” he pointed out.