Savings rates on small savings could fall more than 50 basis points over the next few days as the Finance Ministry comes up with its new formulation to reset rates on a quarterly basis instead of the existing annual basis.
Based on this, interest rates for a 5-year National Savings Certificate (NSC) could come down from 8.5% to around 7.96% based on an average of G-Sec yields over the past three months.
It is not clear if the government will lower the spread on small savings. Right now, spreads are 25 bps for all instruments over the corresponding government paper, 50 bps for 10-year NSCs and 100 bps for Senior Citizen Savings Schemes.
A senior official of the Finance Ministry said the government did not plan to change the spread for either senior citizens or the Sukanya Samriddhi girl child scheme. But even if the spread is left untouched, rates will still come down since they have fallen on government paper of corresponding tenure.
Rates on the 10-year NSC, based on the 50 bps spread, could fall from 8.8% to 8.17%; that on PPF from 8.7% to 7.92%; and, that on the Senior Citizen Savings Scheme could fall from 9.3% to 8.7%, assuming the spread of 100 bps is not reduced.
Once these rates are announced, bank deposit and lending rates are also expected to fall. While the RBI has been cutting rates, banks have passed on less than half of the cuts on account of high rates on small savings schemes. According to banks, if they cut rates, a large part of their deposits would flow into small savings schemes. Also, small savings get various tax benefits as opposed to the interest on bank deposits.
For example, a 1-year postal deposit offers 8.4% whereas State Bank of India offers 7.25% for deposits of the same tenure (7.5% for senior citizens). For the girl child’s welfare, the Sukanya Samriddhi Account Scheme offers 9.2% interest for a period up to 10 years while SBI offers only 7% on term deposits of 5-10 years (7.25% for senior citizens).
Even though the interest rate is reset every year (that would be applicable to incremental deposits), small savings rate is fixed for the entire tenure of a deposit booked at a particular time. The cumulative corpus of National Small Savings Fund is projected to rise to Rs 9.59 lakh crore after accretion of Rs 52,000 crore in 2015-16.