Despite successive hikes in the interest rates on several small savings instruments (SSIs) in the last three quarters, the returns on five such schemes are still significantly lower than what they should have fetched as per the formula adopted for them.
In the October to December 2022 quarter, the Centre had raised returns on five of 11 SSIs by a range of 10 to 30 basis points (bps) — the first such hike effected since January 2019. One basis point equals 0.01 percentage point. For January to March 2023, a 20 bps to 110 bps increase was announced on eight schemes.
For the current quarter, interest rates on most small savings instruments were raised by 10-70 bps, barring the Public Provident Fund (PPF) whose return has been maintained at 7.1% since April 2020.
As per calculations released by the Reserve Bank of India (RBI) on Friday, the gap between the formula-based rates and the current rates is in the range of 5 bps to 82 bps for five SSIs, including the PPF.
The widest gap is in the returns offered on the Recurring Deposit Account which is yielding 6.2% to depositors as opposed to 7.02% prescribed by the formula for SSIs accepted by the government since 2016. The similar gap from the PPF rate is 66 bps, a tad wider than the 62 bps gap that prevailed two quarters ago.
Sukanya Samriddhi Account
The Sukanya Samriddhi Account (SSA) scheme’s returns, hiked to 8% in this quarter for the first time in four years, are also 26 basis points lower than the formula-based rate of 8.26%. SSA returns had been at 7.6% till March, with the distance from the formula rates pegged at 62 bps two quarters earlier.
The Senior Citizens’ savings scheme, which now offers 8.2% — the highest return among all SSIs, should have earned 8.25% this quarter. A similar, relatively smaller, but statistically significant six basis point chasm exists between the 7.4% offered on savings in the Monthly Income Scheme compared to the formula-based rates.
The formula for small savings rates, recommended by a panel led by former RBI Deputy Governor Shyamala Gopinath, mandates a quarterly reset that links their returns to the average quarterly yields on government securities in the first three of the preceding four months.
“The government wants to cut down costs of small savings and prefers to use market borrowings. Therefore, it appears to be not following the committee guidance,” Bank of Baroda chief economist Madan Sabnavis told The Hindu, reacting to the details released by the RBI.
Three of 11 SSIs — the NSC VIII, along with one- and five-year term deposits — are exactly on par with the formula-based rate for them, while three others trail by a miniscule one or two basis points.