The finance ministry on Tuesday decided to reduce interest rates on some small savings schemes of up to 5-year maturity by 25 basis points starting April 1. Interest rates on 1-year, 2-year and 3-year term deposits, Kisan Vikas Patras and 5-year recurring deposits are being lowered by 25 bps.
The government kept interest rates unchanged on schemes including Sukanya Samriddhi Yojana, Senior Citizen Savings Scheme, Monthly Income Scheme. Rates on 5-year term deposit, 5-year National Saving Certificates and Public Provident Fund (PPF) were also left untouched, the finance ministry said. Interest rates on all small savings schemes, which are linked to government securities’ interest rates, will be reviewed quarterly starting April 1, as opposed to yearly readjustment at present. The government will in March notify the new rates for various schemes for the April-June quarter.
“This (reduction in rates for some schemes) is expected to help the economy move to a lower overall interest rate regime eventually and thereby help all, particularly low-income and salaried classes,” the finance ministry said. Reduction in rates of these schemes will make them closer in interest rates to the similar instruments of the banking sector, it said.
The government also decided to permit premature closure of PPF accounts in genuine cases, such as cases of serious ailment and higher education of children.
“The above changes have been brought with the objective of making the operation of National Saving Schemes market-oriented in the interest of overall economic growth of the country, even while protecting their social objectives and promoting long term savings,” the finance ministry said.
The compounding of interest which is biannual in the case of 10-year National Saving Certificate, 5-year National Saving Certificate and Kisan Vikas Patra, shall be done on an annual basis starting April 1.
The government said interest rates on various schemes were kept unchanged to encourage long term savings. The finance ministry said the national savings scheme offers complete security of investment combined with high attractive returns. The interest rates for these schemes range from 8.4 per cent for a one-year time deposit to 9.3 per cent for the 5-year Senior Citizens Savings Scheme.
In the recent past, bankers have often cited high small savings rates as the reason for being unable to lower their fixed deposit rates and transmit rate cuts by the central bank. “The small savings interest rates are perceived to limit the banking sector’s ability to lower deposit rates in response to the monetary policy of the Reserve Bank of India,” the ministry said.
The RBI has cut policy rate by about 125 basis points since January last year while banks have passed on rate cuts of only 70 basis points.
In September last year, finance minister Arun Jaitley had said the government will review small savings framework to facilitate monetary policy transmission by banks.