Interest Rates on Small Saving Schemes | 29 Jun 2021

Why in News

Government may reduce interest rates on small saving schemes for the July - September Quarter.

• A cut in small savings rates at this point would further hurt households amid a surge in inflation, according to economists.

Key Points

• Background:
  
  • Small savings rates were slashed between 0.5% and 1.4% on different instruments in April 2020, bringing the PPF (Public Provident Funds) rate to 7.1% from 7.9%.
  • The government decided to further slash interest rates for the first quarter of 2021-22 (April-June), but withdrew its decision terming it an "oversight".
• Small Saving Schemes/Instruments:
  
  • About:
    
    • They are the major source of household savings in India and comprises 12 instruments.
    • The depositors get an assured interest on their money.
    • Collections from all small savings instruments are credited to the National Small Savings Fund (NSSF).
    • Small savings have emerged as a key source of financing the government deficit, especially after the Covid-19 pandemic led to a ballooning of the government deficit, necessitating higher need for borrowings.
  • Classification: Small savings instruments can be classified under three heads:
    
    • Postal Deposits (comprising savings account, recurring deposits, time deposits of varying maturities and monthly income scheme).
    • Savings Certificates: National Small Savings Certificate (NSC) and Kisan Vikas Patra (KVP).
    • Social Security Schemes: Sukanya Samriddhi Scheme, Public Provident Fund (PPF) and Senior Citizens‘ Savings Scheme (SCSS).
  • Determination of Rates:
    
    • Interest rates on small savings schemes are reset on a quarterly basis, in line with the movement in benchmark government bonds of similar maturity. The rates are reviewed periodically by the Ministry of Finance.
      
      • For the last one year, yields on benchmark government bonds have ranged between 5.7% and 6.2%. This provides the government the leeway to cut rates on small savings schemes in future.
    • The Shyamala Gopinath panel (2010) constituted on the Small Saving Scheme had suggested a market-linked interest rate system for small savings schemes.
• Advantage of the Rate Cut:
  
  • Since the central government uses the small savings fund to finance its deficit, the lower rates would reduce the cost of deficit financing.
  • A cut in rates would mean that the government wants people to spend and provide impetus to the economy.
• Disadvantage:
  
  • Rate cuts would hurt investors, particularly senior citizens and the middle class.
    
    • Moreover, household savings have been shrinking significantly for two quarters in a row even before the second Covid-19 wave.
  • This would lead to further rationalisation of fixed deposit rates by banks going forward, and would reduce returns further.
  • A lower rate would mean a negative real rate of return on most debt instruments as inflation is hovering around 5%.

Source: TH