Small savings schemes likely to see a rate cut in Q1 FY26

“You should expect a reduction in your bank’s fixed deposit rate after the cut in RBI policy rate. Small savings are offering the best interest rates till March 31, but it may get revised later,” the official said.

Small savings rates were raised earlier since the third quarter of FY23 by 70-250 basis points in line with the tightening monetary cycle by the RBI. Also, the hike in small savings rate is seen as necessary to protect savers, especially senior citizens amid a higher inflation rate and a rising interest rate cycle.

Interest rates on small saving schemes are reset quarterly, in line with the movement in benchmark government bonds of similar maturity. Typically, the small saving rates are linked to yields on benchmark government bonds, but despite the movement in G-sec yields, the interest rate changes have not strictly matched the yield movements over the past years.

Among most savings options for investors, small savings schemes offer the highest rates. The Sukanya Samriddhi scheme provides an interest rate of 8.2 per cent, the highest among all such schemes whereas the popular Public Provident Fund offers 7.1 per cent since April 2020. The interest rate for Mahila Samman interest rate is 7.5 per cent. While the Budget has not specified any extension to the Mahila Samman scheme, the government will have to pay the 7.5 per cent interest rates for the next two years for those who invest before March 31. For those who had invested earlier in the scheme beginning April 1, 2023, the repayment period will start after March 31. “Next year, we have to start paying back the people who have deposited. If they have deposited in the first year, their repayment becomes due next year,” the official said.

The RBI on Friday announced a 25 basis point cut in the repo rate, bringing it down to 6.25 per cent, marking the first reduction in nearly five years.

The National Small Saving Fund (NSSF) is an important source of financing the Centre’s fiscal deficit. The government has budgeted its offtake from the NSSF at Rs 4.11 lakh crore in FY25. It has budgeted to tap NSSF for about Rs 3.43 lakh crore in FY26, factoring in Rs 20,000 crore redemption under the Mahila Samman scheme.