In a move that may affect lakhs of depositors, the government might reduce interest rates on some small savings schemes for the July-September quarter, according to a Business Standard report. The cut in the interest rates could be as much as 30-50 basis points (100 bps=1 percentage point), it stated.

The Centre had changed small savings rates in the last quarter (January-March) of FY19. The rates were left unchanged in the April-June quarter of FY20, ahead of General Elections in April-May, despite government bond yields in the secondary market declining 29 bps in the same period.

The Department of Economic Affairs might send a notification on the same either later this week or early next week.

Moneycontrol could not independently verify the news.

Ahead of the General Elections, the ruling Bharatiya Janata Party's (BJP) manifesto had promised to lower the cost of capital.

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

The central bank has cut policy rates thrice so far in in 2019. Earlier in June, the MPC cut policy rates by 25 bps, bringing the repo rate down to 5.75 percent. As per minutes of the June meeting, RBI Governor Shaktikanta Das said interest rates on small savings schemes were 'higher than the prescribed formula'.

At present, the interest rate on one-year, two-year and three-year fixed deposits are seven percent and that for five-year deposit is 7.8 percent.

The government hopes that cutting interest rates for small savings schemes will push banks to lower their rates as well, which have been hitherto reluctant to lower rates, citing higher rates for small savings schemes.

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

Every quarter, since April 2016, the government has been setting interest rates on small savings schemes to align it with market rates. In the last one-year, it has tweaked rates twice, with the October-December quarter seeing a hike of 30-40 bps.

However, the interest rates on these schemes have been decided in an arbitrary manner with no congruence with the movement of government bond yields.