Time for govt to hike small savings rates

The interest rates on small savings schemes need to be hiked for the second quarter of the current fiscal, beginning since July 1, 2022. Rates for the small savings schemes for Q2 are set to be announced in end-June. The reason is not far to seek. The sharp increases have been seen in the G-Sec yields of various maturities, to which such rates are linked.

Interest rates on various small savings schemes have not been changed for the last eight quarters since Q1 FY2021. As on date, Public Provident Fund (PPF) fetches 7.1 per cent, which is the highest among various small savings schemes and hence it is the most popular one. National Savings Certificate (NSC) yields 6.8 per cent, whereas the rate on the girl child savings scheme Sukanya Samriddhi Yojana is 7.6 per cent. The interest rate on savings deposits will continue to be 4 per cent per annum. Term deposits of one to five years will fetch an interest rate in the range of 5.5-6.7 per cent, to be paid quarterly, while the interest rate on five-year recurring deposits will earn a higher interest of 5.8 per cent.

An increase in small savings rates could lead to higher flows into such schemes, limiting the need for additional dated market borrowings to absorb any potential overshooting of the Government of India's fiscal deficit, which analysts project at under Rs1 trillion.

This would also lessen the nervousness of the bond market, and help to cap G-sec yields. Based the forthcoming quarter, Icra expects the 10 year G-sec yield to rise to as much as 7.75-8.0 per cent during the upcoming quarter, from the prevailing 7.4 per cent.

The government has decided to maintain status quo on interest rates of small savings instrument for the April-June quarter. Interest rates on small saving schemes are reset on a quarterly basis, in line with the movement in benchmark government bonds of similar maturity.

The move to keep interest rates intact is surprising in the wake of a sharp reduction in interest rate that was recommended by Central Board of Trustees of Employees' Provident Fund Organisation (EPFO) in March.

Typically, small savings rates are linked to yields on benchmark government bonds but despite the movement in G-sec yields, the government had not reduced the interest rates over the last two years. However, the scenario has completely changed from May onwards as the RBI has become hawkish while increasing the rates.

The interest rates were revised for the first quarter of 2021-22 (April-March), and reduced sharply by 40-110 basis points, but the decision was later rolled back, with the Finance Minister saying that the "orders issued by oversight shall be withdrawn". The reduction of interest rates and subsequent withdrawal had happened in the run-up to the West Bengal Assembly elections. Prior to that, the interest rates were revised two years ago for the first quarter of 2020-21.