After keeping small savings rates unchanged for nine consecutive quarters, the Finance Ministry Thursday hiked interest rates on some of the small savings schemes for October-December. Interest rates were marginally hiked for 2-year and 3-year time deposits, senior citizens savings scheme and Kisan Vikas Patra, while rates for other schemes remained unchanged.
The changes have come amid higher inflation rate and a rising interest rate cycle. The recent retail inflation print for August came in at 7 per cent, marking the eighth month above the upper threshold of the RBI’s target of 4 +/- 2 per cent, and almost three years (35 months) of staying above 4 per cent. The repo rate currently stands at 5.4 per cent, after a raise of 140 basis points since May. The view within the ministry for hiking rates is to “balance the interests of senior citizens, persons saving in instruments without tax benefits along with keeping the interest rate for small savings in check”, which essentially translates into a higher interest cost for the government when it borrows against the National Small Saving Fund. Interest rates on small saving schemes are reset on a quarterly basis, in line with the movement in benchmark government bonds of similar maturity. Typically, small saving 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. Among the most popular fixed income products, the Public Provident Fund (PPF) will fetch 7.1 per cent, while the National Savings Certificate yields 6.8 per cent. Rates on the girl child savings scheme Sukanya Samriddhi Yojana are 7.6 per cent.
The interest rate on savings deposits will continue to be 4 per cent per annum. EPF continues to have a higher interest rate for its subscribers despite the rate being reduced to 8.1 per cent for FY22 – the lowest in four decades. The interest rates were earlier 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but the decision was later rolled back, with the finance minister saying that the “orders issued by oversight shall be withdrawn”.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 the 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.