Small savings' interest rate to be more market-sensitive

Those looking to save might soon find small savings only as attractive as banks, with the interest rates for the former soon to be more market aligned and reviewed frequently.

The government will announce new interest rates for small savings schemes in a day or two. The new rates will be more closely aligned with the markets and will be reviewed quarterly instead of annually, Economic Affairs Secretary Shaktikanta Das said on Thursday.

“The decisions have been taken and the executive order and notification would be issued in a day or two. Broadly, the underlying philosophy of small savings rate changes is to make it more frequently market aligned, make it as closely market aligned as possible,” he said.

Small savings schemes include the National Savings Scheme, Kisan Vikas Patra, post office deposits, and Public Provident Fund. The interest rates for these range from 8.4 per cent for a one-year deposit to 9.3 per cent for the five-year Senior Citizen Savings Scheme. Banks have been reluctant to transmit the entire policy rate cut to borrowers as they want to keep their deposit rates attractive to match with those in the popular small saving schemes.

 

Small savings rate are linked to government securities’ interest rates which are readjusted every year. Das said that from April 1, the government will move to a quarterly adjustment of rates.

“At the same time taking into consideration in the interest of small savers and some important social sector measures, the rates under the girl child scheme and the senior citizen scheme will remain unaltered. They will continue as it is,” he added.

 “They will have quarterly adjustments but whatever spreads they have over the G-Sec rates will not be altered. Similarly, all long term savings (more than five years) will continue to have the existing spreads,” he said.

Finance Minister Arun Jaitley had announced on September 29 that the centre would review small savings schemes to enable transmission of the central bank’s rate cut by banks. This was the same day when Reserve Bank of India Governor Raghuram Rajan had cut interest rate by 50 basis points (bps) from 7.25 per cent to 6.75 per cent, bringing it to a total cut of 125 basis points for the calendar year 2015.

The finance ministry has finalised suggestions that were made by various stakeholders, including banks and other ministries and brought it up during the pre-budget meetings with country’s top banks and leading economists suggesting changes in the small savings rate.

He said that the alignment of interest rates of the schemes will be done with G-sec rates of comparable maturities and added that the interest rate reduction would mostly affect schemes at the lower end of the maturity curve.

Speaking on the recently announced advanced GDP estimates, which project 2015-16 GDP growth at 7.6 per cent, Das said that a time of global financial turmoil, India’s resilience is ‘noteworthy’.

“As we have pointed out, the world is in turmoil and there is uncertainty globally, there is volatility, which now appears to have become a new norm and every day there is a new challenge or a new development from some part of the world or the other.”

“Given this kind of volatility, and turmoil prevailing all over the world in the global economy as a whole, the growth forecast for the current year at 7.6 per cent is definitely noteworthy and very significant. This is reflective of the fact that amidst global crisis, India is able to show a growth which one can call robust under the circumstances,”  he noted.