Govt retains interest rates on small savings; depositors may cheer decision

A cheer for depositors, the move is contrary to what RBI and banks had advised

The government has kept interest rates on small savings schemes intact for January-March 2020, compared to those during October-December 2019, contrary to what the Reserve Bank of India (RBI) and banks had advised. 

Depositors are, however, likely to cheer the decision.  

“On the basis of the decision of the government, the rates of interest on various small savings schemes for the fourth quarter of 2019-20... shall remain unchanged from those notified for the third quarter,” said an office memorandum by the Department of Economic Affairs (DEA) in the finance ministry. 
 

At present, fixed deposits up to 10 years offered by State Bank of India draw an interest rate of 6.25 per cent, says the bank’s website. However, the public provident fund, or PPF, and national savings certificate deposits fetch 7.9 per cent, which are also tax-free in nature. 

In fact, specific schemes such as the one for the girl child — Sukanya Samridhi Account Scheme — attracts an interest rate of 8.4 per cent. 

Devendra Pant, chief economist at India Ratings, said people will naturally prefer deposits that give them higher interest rates. In addition, the reach of post offices is much deeper than banks, said Pant. 

Another economist said the amount collected through small savings schemes is just 10 per cent of the incremental bank deposits. This should also be considered while gauging the impact of small savings schemes on bank deposits.  

According to the monetary policy statement, though the RBI reduced the repo rate by 135 basis points (bps) between February and October, the weighted-average lending rate on fresh rupee loans of banks declined only by 44 bps during the period. The weighted-average lending rate on outstanding rupee loans has actually increased by 2 bps during the period.

Recently, SBI Chairman Rajnish Kumar had said that banks could not go beyond a threshold to reduce deposit rates, which are linked to the lending rates.