Some small savings schemes see up to 30-basis point hike for Q3 of FY23

National Savings Certificate, Public Provident Fund rate kept unchanged

In the first hike in small savings rates since January 2019, the finance ministry on Thursday increased the interest rates payable on five of 12 such schemes for the third quarter (October-December) of the financial year ending on March 31, 2023 (FY23), leaving other interest rates unchanged.

The up to 30-basis point (bp) hike may come as a relief to small savers, farmers and senior citizens amid elevated inflation, but the fear of higher interest burden may have prevented the government from hiking small savings rates across the board, say experts.

The decision came a day after the Union Cabinet hiked dearness allowance (DA) and dearness relief (DR) for central government employees by 4 percentage points to 38 per cent of basic pay ahead of the festival season.  

Small savings rates for Kisan Vikas Patra (7 per cent), 2-year time deposit (5.7 per cent), 3-year time deposit (5.8 per cent), senior citizen savings schemes (7.6 per cent) and monthly income account (6.7 per cent) were increased by 10 bps, 20 bps, 30 bps, 20 bps and 10 bps respectively. For Kisan Vikas Patra, the finance ministry reduced the maturity period to 123 months from 124 months earlier.

However, the finance ministry kept interest rates unchanged for savings deposit scheme (4 per cent), 1-year time deposit (5.5 per cent), 5-year time deposit (6.7 per cent), 5-year recurring deposit (5.8 per cent), national savings certificate (6.8 per cent), public provident fund scheme (7.1 per cent) and Sukanya Samriddhi Account scheme (7.6 per cent).

Deepesh Raghaw, founder, Personal Finance Plan, a Securities and Exchange Board of India-registered investment advisor said the government was trying to be fiscally prudent and populist at the same time. “As an investor, I would expect more. The government might say they didn’t reduce the rates when the interest rates were really low. The small savings rates should be linked to government bond yields, which is close to 7.5 per cent at present,” he added.  

Aditi Nayar, chief economist at ICRA said she was expecting wider increases in small savings rates. “Buoyant revenues may be able to absorb a large portion of the higher than budgeted expenditure, which appears to have restricted the size of the H2 FY23 borrowing program. Some expenditure savings may be needed (for the government) to remain within the borrowing envelope,” she added.

Last year on March 31, the finance ministry had cut small savings interest rates but reversed the decision overnight, blaming the decision on an oversight, after the cuts set off a social media uproar ahead of the assembly election in West Bengal.

The high interest rates on these schemes are frequently blamed by banks for their inability to reduce lending rates. High short-term interest rates on small savings schemes force banks to match interest rates on their deposits as well, preventing them from significantly rationalising loan rates during policy rate cut cycles.

After the Reserve Bank of India raised concerns about limited transmission of its policy rate cuts, the finance ministry started quarterly review of small savings rates, beginning April 1, 2016, making the process more dynamic and market linked.