Will 2023 bring succour for small savings?

With the Centre’s market borrowing plans held at the same level despite a higher spending outlay, the government can tap the National Small Savings Fund, says one economist

December 29, 2022 08:03 pm | Updated 09:24 pm IST - NEW DELHI  

Representational image

Representational image

With inflation averaging at more than 6% through 2022 and interest rates rising, there is an economic rationale for returns on small savings instruments such as the Public Provident Fund (PPF) to be raised for the first quarter of 2023, but the government may opt to maintain status quo to keep its own borrowing costs in check.  

The Finance Ministry, slated to announce rates for January to March 2023 on Friday, had effected minor hikes of 0.1% to 0.3% on five out of a dozen small savings instruments for the current quarter. While this was the first hike since January 2019, the returns on several schemes such as the popular PPF were left untouched.  

As per Reserve Bank of India calculations, the rates on these schemes, based on a formula linked to the yields on government securities (G-secs), are 44 to 77 basis points (bps) below their formula-implied rates. One bp equals 0.01%. As per the formula, the PPF return should have been set at 7.72% instead of the present 7.1% and rates on nine of the dozen schemes were 55 bps to 77bps lower than the formula-linked rate.   

Bank of Baroda chief economist Madan Sabnavis said it is important to protect the vulnerable, low-income groups and senior citizens who park their savings in these schemes from the impact of high inflation, and it would be ideal to follow the formula-based rates.   

However, the government may choose not to tinker with the rates. “Last time, the small savings rates were raised marginally and only on select schemes,” he pointed out.  

“The government may want to protect its own interest payment bill as higher small savings rates would mean higher costs. However, as there is a formula-based system in place, the government shouldn’t be thinking of costs alone,” he told The Hindu. 

With the Centre’s market borrowing plans held at the same level despite a higher spending outlay (spelled out in the recent supplementary demand for grants), the government can tap the National Small Savings Fund but ideally at a higher cost, Mr. Sabnavis pointed out. 

Top News Today

Sign in to unlock member-only benefits!
  • Access 10 free stories every month
  • Save stories to read later
  • Access to comment on every story
  • Sign-up/manage your newsletter subscriptions with a single click
  • Get notified by email for early access to discounts & offers on our products
Sign in

Comments

Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.

We have migrated to a new commenting platform. If you are already a registered user of The Hindu and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.