Government slashes rates on small savings schemes by up to 1.1%

The government has sharply slashed the rates on all small savings instruments for the first quarter of 2021-22, bringing the rate of return on the Public Provident Fund down from 7.1% to 6.4% and effecting cuts ranging from 40 basis points (0.4%) to 110 basis points (1.1%) through a notification on Wednesday.

The sharpest cut announced earlier was seen in the quarterly interest rate paid on one-year term deposits, from 5.5% in the January to March quarter to 4.4% in this quarter. The rate of return on the Senior Citizen Savings’ Scheme was cut from 7.4% to 6.5%, while the Sukanya Samriddhi Account Scheme’s return was reduced from 7.6% to 6.9%.

While the government resets the interest rate on small savings instruments every quarter, this round of rate cuts assume significance as retail inflation has been breaching the 6% mark and the government is keen to lower interest rates to make it easier to execute its borrowing plans for the year and spur growth.

Major impediment

The government plans to borrow ₹12.05 lakh crore in 2021-22, on the back of a record gross borrowing of ₹13.71 lakh crore in 2020-21. High small savings rates have been cited by the central bank as a major impediment in ensuring policy rate cuts get transmitted into the banking system.

Government slashes rates on small savings schemes by up to 1.1%

“After keeping rates largely unchanged over the last few quarters, the government has effected a substantial lagged revision in small savings rates, mirroring the moderation in interest rates in the wider economy seen over the last year,” said Aditi Nayar, principal economist at ICRA Limited.

The interest rate paid on National Savings Certificate and Kisan Vikas Patra were also reduced significantly, from 6.8% to 5.9%, and from 6.9% to 6.2%, respectively. Consequently, the Kisan Vikas Patra, which used to mature in 124 months, will now mature in 138 months.

While savings deposits earned the lowest rate of 4% till now, that return has now been further slashed to 3.5%. Among time deposits, the return on five year deposits has been reduced from 6.7% to 5.8%. Five-year recurring deposits, whose interest is compounded quarterly, will get a return of 5.3% instead of 5.8% in the previous quarter.

For savers, the option with the highest returns at this point is the Sukanya Samriddhi Account Scheme, followed by the Senior Citizens’ Savings Schemes and the Public Provident Fund.

*Update: In a tweet on early Thursday, April 1, 2021, Finance Minister Nirmala Sitharaman said that the order has been withdrawn.  “Orders issued by oversight shall be withdrawn,” she said in a tweet, stating that rates will continue at the same level as last quarter. The development assumes significance with five State assembly polls are underway. A detailed report on the Ministry's latest order is awaited.

This article is closed for comments.
Please Email the Editor

Printable version | May 11, 2021 3:53:09 PM |

Next Story