Recently, the Indian Government took a dramatic step to cushion the economic hardship caused by the coronavirus pandemic, slashing interest rates on small savings schemes. The National Savings Certificate and Public Provident Fund were included in this reduction, echoing the Reserve Bank of India’s 75 basis point cut in its main interest rate. Small savings scheme interest rates are adjusted quarterly.
Pertinent Points
With regard to the National Savings Certificate, the government has decreased interest rates by 110 basis points to 6.8%. Meanwhile, Public Provident Funds (PPF) have experienced an 80 basis points reduction for the quarter, bringing it down to 7.1%. Kisan Vikas Patra rates have also seen a cut, dropping by 70 basis points to 6.9%.
Understanding the Rate Cuts
This rate cut aligns with the RBI’s recent cut in key interest rates and is part of the Government’s Fiscal Policy – a strategy used alongside Monetary Policy (led by the Central Bank) to achieve economic goals. Traditionally, small savings schemes have been alluring due to their higher interest rates and tax benefits. However, this has resulted in impaired bank deposit mobilisation and hampered policy rate cut transmission – prompting the RBI to advocate for a small saving rate rationalisation. The government’s move ushers the country into a low-interest rate regime.
About the Small Savings Scheme
The small savings scheme encompasses 12 instruments, including the National Saving Certificate (NSC), Public Provident Fund (PPF), Kisan Vikas Patra (KVP), and Sukanya Samriddhi Scheme. Other options include a Saving Deposit, Monthly Income Deposit, and various time and recurring deposits. Rates for these schemes are adjusted on a quarterly basis. Theoretically, rate changes should depend on the yields of government securities of similar maturity, though political factors can also influence these changes.
The Shyamala Gopinath Report on Small Savings Scheme
A panel led by Shyamala Gopinath was established to assess the Small Saving Scheme and suggested a system of market-linked interest rates for small savings schemes to eliminate rate distortion and contribute to the financial stability of the country.
Sources: The Hindu
