Govt keeps interest rate of small savings schemes unchanged for Q1FY23

Rising inflation rate and increasing chances of the RBI reversing its accommodative policy stance may have prevented the govt from cutting small savings rates


small savings schemes | Interest Rates

In relief to the middle class and small savers, the finance ministry on Thursday left interest rates on government backed saving instruments unchanged for the first quarter (April-June) of FY23. The decision came days after the interest rate on employees’ provident fund organisation (EPFO) deposits was cut to a four-decade low of 8.1 per cent for FY22 from 8.5 per cent in the previous year.

Rising inflation rate and increasing chances of the Reserve Bank of India reversing its accommodative policy stance, which may lead to increase in interest rates, may have prevented the government from cutting small savings rates.

“The rate of interest on various small savings schemes for the first quarter of financial year 2022-23 starting from 1st April, 2022 and ending on 30th June, 2022 shall remain unchanged from the current rates applicable for the fourth quarter (1st January, 2022 to 31st March, 2022) of FY 2021-22. This has the approval of the competent authority,” the Department of Economic Affairs in the finance ministry said in a statement.

Among the key government backed savings instruments, interest rates on national savings certificate, senior citizen savings schemes, public provident fund scheme, Kishan Vikas Patra, Sukanya Samriddhi Account scheme remained unchanged at 6.8 per cent, 7.4 per cent, 7.1 per cent, 6.9 per cent, 7.6 per cent respectively for the April-June quarter.

Aditi Nayar, chief economist at ICRA Limited said with the rise in yields of government securities over the last three months, as well as the inching up of deposit rates of banks, she had foreseen a small probability of the small savings rates being revised upwards for the coming quarter. “We expect a shallow rate hike cycle to commence in mid-2022, with 50 bps of repo hikes over August-October 2022, which may subsequently be mirrored in small savings rates being hiked,” she added.

A year ago, on 31 March, 2021, the finance ministry had cut small savings interest rates but reversed the decision overnight blaming the decision on an oversight after the cuts set off a social media uproar ahead of the assembly election in West Bengal.

The high interest rates of these schemes are frequently blamed by banks for their inability to reduce lending rates. They argue that lower rates on small savings schemes would allow them to better pass on policy rate cuts by the central bank. High short-term interest rates on small savings schemes force banks to match interest rates on their deposits as well, preventing them from significantly cutting loan rates in tandem with policy rate cuts. After RBI raised concerns about limited transmission of its policy rate cuts, the finance ministry started quarterly reviews of small savings rates, beginning 1 April 2016, making the process more dynamic and market-linked.

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