Govt may cut interest rates of small savings schemes for July-Sept quarter

For some schemes the cut may be 30-50 bps; not all will be affected

The government may lower interest rates on small savings schemes for the July-September quarter, according to senior government sources. The cut may only be for some — and not all — small savings schemes, and could be as high as 30-50 basis points.

The last round of changes in small savings rates were for the January-March quarter. The rates for one-year, two-year, and three-year time deposits were aligned with each other. The rates for the April-June quarter remained unchanged.

“Reducing the cost of capital to boost investment has been a stated aim of this administration. A part of that was done when the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) cut interest rates thrice. Now the small savings rates will be reduced to speed up the transmission of the interest rates,” said an official.

The Bharatiya Janata Party’s manifesto for the 2019 election also stated the aim of lowering the cost of capital. “By lowering inflation and cleaning up the banking system, we are now in a position to structurally lower the real cost of capital,” the manifesto stated.

The small savings rates for July-September will be notified by the Finance Ministry’s Department of Economic Affairs either later this week or early next week.

The MPC, which is headed by RBI Governor Shaktikanta Das, had cut the policy rate by 25 basis points and changed its stance to “accommodative” in its last monetary policy meeting in early June.

After this latest cut, the repo rate now stands at 5.75 per cent. This is the third consecutive cut by 25 bps  since February. In all its monetary policies, the Das-led MPC has executed a cut.

According to the minutes of the June meeting, Das had pointed out that interest rates on small savings schemes were “higher than the prescribed formula”.

Banks have been reluctant to cut their lending rates, citing higher interest rates for the small savings schemes. The government hopes that a cut for the coming quarter will lead to banks also lowering the cost of borrowing for corporate and individual borrowers.

“The most effective way to boost investment for the corporate entities and consumption for households is by reducing rates and putting more money in their hands,” said the official quoted above.

Since April 2016, the government has been setting interest rates on small savings schemes on a quarterly basis to better align them with market rates. However, small savings rates continue to be decided in an arbitrary manner, with movements in government bond yields usually not reflecting in the interest rate of these schemes.

The interest rates on all small savings schemes were left unchanged for April-June because of the upcoming Lok Sabha elections, despite government bond yields in the secondary market declining by 29 basis points (bps) for the same period, publicly available data on Bloomberg shows.

Interest rates on small savings schemes have been tweaked in two of the last four quarters, with October-December seeing a hike of 30-40 bps.