The rates on small savings schemes have been reduced to align them to market rates. (Illustration by: C R Sasikumar) The rates on small savings schemes have been reduced to align them to market rates. (Illustration by: C R Sasikumar)

The government on Friday sharply reduced interest rates on small savings schemes across the board, including that on Public Provident Fund, Senior Citizen Savings Scheme and announced the highest reduction of 130 basis points in the case of one-year time deposit, as per an office order issued by the finance ministry. The rates on small savings schemes have been reduced to align them to market rates.

Since the government is now moving on revising interest rates on such schemes every quarter, the new rates, therefore, will be applicable from April 1 to June 30. Effective April 1, interest rate payable on 1 year time deposit has been slashed to 7.1 per cent from 8.4 per cent.

Interest rate on Public Provident Fund (PPF) scheme will be cut to 8.1 per cent for the period April 1 to June 30, from 8.7 per cent, at present. Rate on Kisan Vikas Patra is being lowered to 7.8 per cent from 8.7 per cent. Interest rates on Sukanya Samriddhi Account Scheme, which was launched by Prime Minister Narendra Modi especially for the girl child, too are being reduced to 8.6 per cent from 9.2 per cent.

Terming the decision slashing of interest rates as a “normal exercise of resetting” rates in March every year, Economic Affairs Secretary Shaktikanta Das said, according to a report.

“This will enable banks to consequently reduce their deposit rates and extend loan and credit to public and borrowers at lower rates.” Interest rate on five-year Senior Citizen Savings Scheme has also been reduced to 8.6 per cent from 9.3 per cent. The popular five-Year National Savings Certificates will earn an interest rate of 8.1 per cent as against 8.5 per cent. A five-year Monthly Income Account will fetch 7.8 per cent as opposed to 8.4 per cent now.

The government had on February 16 announced moving small saving interest rates closer to market rates, but said that the interest rate and the spread that some of these schemes enjoy will remain untouched. However, on Friday the government slashed rates on all schemes.

In its February 16 statement, the finance ministry had said: “The Sukanya Samriddhi Yojana, the Senior Citizen Savings Scheme and the Monthly Income Scheme are savings schemes based on laudable social development or social security goals. Hence, the interest rate and spread that these schemes enjoy over the G-sec rate of comparable maturity viz., of 75 bps, 100 bps and 25 bps respectively have been left untouched by the Government.” On Friday, however, the rates on these three scheme were reduced by 60-70 basis points.

While the interest rate on Post Office savings has been retained at 4 per cent, the same for term deposits of one to five years has been cut. Two-year time deposit will now earn 7.2 per cent instead of 8.4 per cent, three-year time deposit will earn 7.4 per cent instead of 8.4 per cent, five-year time deposit will earn 7.9 per cent instead of 8.5 per cent. Five-year recurring deposit will earn 7.4 per cent instead of 8.4 per cent.

Arguing that such rates limit the banking sector’s ability to lower deposit rates in response to the monetary policy of the RBI, Centre had made a case for lowering rates on some schemes. The RBI has cut the repo rate, by 125 basis points since last January, but the banks reduced their lending rate by only about 70 basis points. The RBI is slated to review its monetary policy on April 4.

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