FinMin makes no change to small savings schemes interest rates despite RBI rate cuts

The central government’s decision to not make any changes to the small savings rates comes amid a significant fall in market interest rates, with the RBI having cut the repo rate by 100 basis points (bps) to 5.5 per cent so far in 2025. In addition, the central bank has, since December 2024, been infusing liquidity into the banking system to reverse the tightening impact of its foreign currency sales in the second half of 2024 and to quicken the transmission of its repo rate cuts and help banks lower their lending rates.

To be sure, not cutting small savings rates is seen as a way to protect Indian savers, especially those – such as senior citizens – who depend on guaranteed interest income. At the same time, the government uses the National Small Saving Fund to finance some of its annual fiscal deficit. As per the 2025-26 Union Budget, the central government expects to utilise Rs 3.43 lakh crore of small savings this fiscal to bridge the gap between its income and expenditure, down from Rs 4.12 lakh crore in 2024-25.

Falling bond yields

While set by the government, interest rates on small savings are linked to secondary market yields on government securities. As per the government’s formula-based approach, a spread of 0-100 bps is added to the yield of these securities of comparable maturities. As such, interest rates on small savings schemes should decline when yields on government securities fall. However, over the years, interest rate changes have not strictly followed the movements in government bond yields.

In March-May, which was the reference period for setting small savings interest rates for July-September, yields on some government securities fell by almost a full percentage point. While the yield on the Centre’s 364-day Treasury bill ended May around 90 bps lower than where it was at the end of February, that on five-year bonds was down around 75 bps. Meanwhile, the 10-year bond yield declined by around 45 bps.

Interest rates on small savings schemes were already higher than those prescribed by the government’s formula even before the recent decline in market interest rates. In April, the RBI had said in its six-monthly monetary policy report that “rates on most of the instruments are now above the formula-based rates in the range 16-66 bps.”

“In a rate easing cycle when deposit rates are expected to come down, higher small savings rates can be a potential source of concern for bank deposit growth,” the RBI had further warned in its State of the Economy article, published on April 22.

According to the RBI’s calculations from April, the interest rate on the National Savings Certificate was 66 bps higher than the formula based-rate of interest. Other schemes with higher-than-prescribed rates included the Kisan Vikas Patra (65 bps higher), five-year term deposit (63 bps higher), and the Sukanya Samriddhi Account Scheme (60 bps higher), among others.