Faced with a fresh outcry over the decision to lower returns on small savings schemes, days after he rolled back the budget proposal to tax EPF savings, Finance Minister Arun Jaitley said the economy needs lower interest rates to become more efficient and high deposit rates would keep it “sluggish.”
“Interest rates had risen a lot, so the cost of borrowing for the government and others was high, but now they have come down. The way the economy is moving, we cannot have a situation where lending rates are going down but deposit rates remain high,” he said on Sunday.
“Both rates are linked. To make the economy more efficient rather than sluggish, the country has to move towards lower interest rates in both,” he added.
The Minister pointed out that interest rates on small savings schemes are determined by the market based on an old formula, and subsequently bolstered by the government. “It’s formula-driven… and now this is going to be revised every quarter (to align it with the market),” he said.
The government announced new interest rates on small savings instruments on Friday, slashing the returns on Public Provident Fund savings from 8.7 per cent to 8.1 per cent and one year post office deposits from 8.4 per cent to 7.1 per cent. These interest rates will be reset every quarter based on a formula linked to the rate of return on government securities.
