“Small savings rates must not be raised for the coming quarter”


The government is unlikely to hike small savings rates for the coming quarter when they are reviewed on Thursday, although yields on government bonds have risen, a senior official pointed out that rates have not been cut in two fiscal years.

Small savings rates were last reduced in 2020 on various instruments ranging from 0.5% to 1.4%, reducing the PPF rate from 7.9% to 7.1% as of March 31, 2020. There were interest rate cuts of between 0.4 and 1.1 percentage points, also announced last March, but reversed within hours, citing an “oversight” in the middle of the West Bengal assembly campaign.

The rate on small savings instruments is reset quarterly based on market yields on government bonds (G-sec) lagged by 0 to 100 basis points above yields at comparable maturities. The yield on the 10-year benchmark G-sec hardened to 6.86% on March 11 this year from a low of 6.6% on February 18.

“Since interest rates haven’t been cut all this time, I see no immediate opportunity to raise them,” said a senior Treasury Department official Peppystores. Lowering interest rates could also be difficult as yields on G-secs have risen, he noted.

The Reserve Bank of India noted this month that existing interest rates on small savings need to be cut by 9-118 basis points (or 0.09-1.18 percentage points) in the first quarter of 2022-23 to align with formula-based rates . In January, this difference between the existing small savings rates and the rates determined using the formula was in a range of 0.42 to 1.68 percentage points.

Responding to the RBI’s call to lower small savings rates, the official stressed that interest rate discussions are often too focused on borrowers’ needs. “The Indian government also wants to protect savers and seniors, for whom a steady income is crucial, so an increase in yields is not necessarily bad for these segments of the economy,” he stressed.

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