Govt retains small saving rates

The interest rate on PPF has been retained at 8.1%, the same as in the April-June quarter, when it was cut from the earlier 8.7%

Depositors will get the same interest rates on small saving schemes, such as the Public Provident Fund (PPF), for the quarter ending September as they were in the previous one.

The government is retaining the prevailing rates on all these schemes, in line with the yields on government bonds of equivalent maturities.

The interest rate on PPF has been retained at 8.1 per cent, the same as in the April-June quarter, when it was cut from the earlier 8.7 per cent. This is the second quarterly review of interest rates since the new mechanism came in, of reviewing on small saving schemes every three months, against the earlier system of doing so every six months. The rates for the next quarter are notified on the 15th of the last month of the current one.

The government had switched to the new mechanism in February, with the aim of making these schemes market-oriented and steering the economy eventually to an overall lower interest rate regime. High small savings rates were perceived to limit the banking sector’s ability to lower deposit rates in response to the monetary policy of the Reserve Bank of India (RBI).

In the context of easing the transmission of lower rates in the economy, the government also has to take a comprehensive view on the social goals of certain National Small Savings Schemes.

The rates on term deposits of durations from one to five years will also not change, hovering between 7.1 and 7.9 per cent. The rate on Kisan Vikas Patrika (KVP) and five-year senior citizen savings certificate scheme will be retained at 7.8 per cent and 8.6 per cent, respectively, for the quarter ending September. The interest rate on KVP was cut sharply to 7.8 per cent in April, from 8.7 per cent earlier; that on senior citizen savings from 9.3 per cent.

“The yields on 10-year government securities have remained steady since March at 7.4-7.5 per cent. Therefore, the government’s decision to keep rates unchanged is in line with the market movement. I do not expect a further cut in small savings rates this year, as yields on government bonds might remain elevated due to global risk factors,” said Soumya Kanti Ghosh, chief economic adviser, State Bank of India.

RBI has cut the repo rate (at which it lends to banks) by 150 basis points (bps) since early 2015, to 6.5 per cent. However, banks have been reluctant to transmit the entire cut to borrowers. They want to keep their deposit rates attractive, to match with those in small saving schemes, popular among citizens. Banks have transmitted close to 60 bps of cuts in lending rates.

They'd argued for a reduction in the small savings rate, explaining that high levels here made their fixed deposits uncompetitive, hampering the transmission of repo rate changes to borrowers. However, the government's move to cut interest rates on these schemes in April had evoked adverse reactions from some quarters.

The five-year National Savings Certificates will continue to earn interest at 8.1 per cent in the next quarter as well. It was 8.5 per cent the previous financial year.

The girl-child savings scheme, Sukanya Samriddhi Account, will continue to earn 8.6 per cent in the three months ending September. The interest rate on the scheme was revised down in April, from 9.2 per cent.

For five-year recurring deposits, the rate will be retained at 7.4 per cent. It was 8.4 per cent in October-March of 2015-16.