Lower interest rate on small savings schemes may trigger rate cuts by banks
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New Delhi: The government on Friday slashed interest rates on small savings schemes, including Public provident Fund (PPF) and Kisan Vikas Patra (KVP), by 10 basis points to align them with market rates, a move that may facilitate further rate cuts by commercial banks in the absence of policy rate cuts by the Reserve Bank of India (RBI).
A basis point is one-hundredth of a percentage point.
RBI is widely expected to hold policy rates in its quarterly monetary policy review on 6 April. The central bank in its last policy review in February changed its stance to neutral from accommodative, citing persistent inflationary pressure.
“We are doing it cautiously keeping in mind the interests of small investors. Anyway, we are maintaining the spread (for social security schemes),” economic affairs secretary Shaktikanta Das said.
The new rates will be effective for the quarter beginning 1 April.
With the latest reduction, the PPF rate has come down to 7.9%. The interest rate on a one-year time deposit is down to 6.9%.
The government announced in February last year that it will review small savings interest rates every quarter instead of annually, based on the yields of government bonds of the previous three months.
According to the notification, the government retained the spread of 25 basis points of long-term savings schemes such as the five-year term deposit, five-year National Savings Certificates (NSC) and PPF over government securities of comparable maturity as these schemes are particularly relevant to self-employed professionals and salaried classes and are meant to encourage long-term savings. However, the compounding of interest of five-year NSCs and KVPs will now be done on an annual basis against the present practice of calculating twice a year.
The linking of interest rates of small savings schemes to the yields of government bonds is expected to allow banks to pass on policy rate cuts by the central bank through lower lending rates. Banks blame high short-term interest rates on the high cost of deposits, which prohibit them from passing on policy rate cuts to borrowers in a significant way.