Government slashes interest rates for small saving schemes

MUMBAI (Reuters) - The government cut interest rates on Friday for term deposits offered to millions of small savers to align them with market rates, which have come down after rate cuts by the Reserve Bank of India (RBI) last year.

The government cut the one-year term deposit rate to 7.1 percent for the period of April to June from 8.4 percent during the 2015/16 fiscal year, which ended in March, according to a government statement. The two-year term deposit rate was lowered to 7.2 percent from 8.4 percent.

The government also lowered the rate on a federal pension fund known as the public provident fund (PPF) to 8.1 percent from 8.7 percent.

Finance Minister Arun Jaitley had agreed to cut interest rates offered to millions of small savers in about $130 billion of federal deposits after the Reserve Bank of India lowered its key policy rate by 125 basis points in 2015.

Indian banks said they could not cut their retail deposit and lending rates substantially when the small savings schemes offered higher rates. That slowed the process of banks passing through the central bank rate cuts to boost economic growth.

Banks have lowered their deposit rate by up to 100 basis points in 2015 and lending rates by around 60 basis points.

The small savings rate will be changed every quarter from next fiscal year, starting in April, to shift them closer to market interest rates.

(Reporting by Suvashree Dey Choudhury, editing by Larry King)