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Economists expect small savings schemes rate hike in June-end after 2 years

The small savings schemes, created for citizens with low risk appetite like senior citizens, girl child, and farmers  did not see any rate changes despite key policy rates seeing a sharp reduction to boost economic demand. (REUTERS)Premium
The small savings schemes, created for citizens with low risk appetite like senior citizens, girl child, and farmers  did not see any rate changes despite key policy rates seeing a sharp reduction to boost economic demand. (REUTERS)

An increase in small savings rates could lead to higher flows into such schemes, limiting the need for additional dated market borrowings to absorb any potential overshooting of the Government of India's fiscal deficit, say economists

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NEW DELHI : We expect the interest rates on small savings schemes to be hiked for Q2 FY2023, given the sharp increases seen in the G-Sec yields of various maturities, to which such rates are linked.
Economists expect a hike in the small savings rate around the end of this month, after remaining unchanged for the last two years. The small savings schemes, created for citizens with low risk appetite like senior citizens, girl child, and farmers  did not see any rate changes despite key policy rates seeing a sharp reduction to boost economic demand.
With inflationary pressures on a rise, the monetary policy committee has increased the repo rate twice, by 90 basis points in two meets so far this fiscal.
Economists believe that the government will finally hike the small savings rate. “An increase in small savings rates could lead to higher flows into such schemes, limiting the need for additional dated market borrowings to absorb any potential overshooting of the Government of India's fiscal deficit, which we project at under Rs. 1.0 trillion," said Aditi Nayar, chief economist, ICRA.  This would also lessen the nervousness of the bond market, and help to cap G-sec yields, said Nayar. Based on an expectation of 60 bps of repo hikes in Q2 FY2023, ICRA expects the 10 year G-sec yield to rise to as much as  7.75-8.0% during the upcoming quarter, from the prevailing 7.4%. 
Small savings schemes, including 1-3-year time deposits and 5-year recurring deposits, are savings instruments managed by the government  to encourage citizens to save regularly. . These also include saving certificates such as National Saving Certificates and Kisan Vikas Patra, Sukanya Samriddhi Account, and Senior Citizens Savings Scheme. 
Rates for the small savings schemes for Q2 FY2023 are set to be announced in end-June 2022.
The average month-end G-Sec yields for one-year, two-year and 5-year bonds have increased substantially to 5.26%, 5.65% and 6.79%, respectively, during Mar 2022- May 2022, from 3.88%, 4.72% and 6.0%, respectively, during Dec 2021-Feb 2022, as well as 3.50%, 4.41% and 5.69%, respectively, during Sep 2021-Nov 2021.

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