Statsguru: The mismatch between formula-based and small savings rates

The government has kept interest rates unchanged on small savings schemes for the ongoing October-December quarter. This was the 11th straight quarter since the last revision in January-March 2024 that rates remained unchanged. Small savings trace their roots to the Post Office Savings Bank Scheme, set up in 1882. Besides this scheme, the basket has since grown to comprise the Public Provident Fund (1968), the Sukanya Samriddhi Account (2015) and nine other schemes, with the money collected going into the National Small Savings Fund. 

 

The Shyamala Gopinath Committee, constituted by the government, recommended that rates on 11 of the 12 instruments, excluding the Post Office Savings Account, be linked to yields on government securities (G-secs) of comparable maturity with a spread of 25-100 basis points. The formula-linked quarterly reset began in April 2016. Explaining this, then Economic Affairs Secretary Shaktikanta Das (now Principal Secretary-2 to the PM) said the aim was to make rates “as closely market aligned as possible.” However, in Q3 FY27 all 11 small savings schemes carry rates above their formula-linked levels. 

 

 The deviation is widest for the one-year time deposit and narrowest for the PPF. In the 43 quarters since 2016, the average small savings rate has been above the formula in 31 quarters. 

 

 Since the first quarterly reset in April-June 2016, the average rate across the 11 schemes has been raised in seven quarters and cut in seven, with the sharpest cut, of 111 basis points, occurring in April-June 2020. It was left unchanged in the other 28 quarters. The schemes remain a popular investment option for many, with deposits estimated to have more than tripled between FY17 and FY26 (RE).