Home > Money > Personal Finance > Interest on small savings schemes to fall; should you lock it?

The interest on small savings scheme may fall as the Reserve Bank of India’s (RBI) has cut its policy rates. According to economists, the government could revise the interest rates on small savings scheme by a token 25-30 basis points across products.

Economists had expected the rates on small savings scheme to fall after the RBI’s February monetary policy meet. In the previous policy meet, the central bank had used instruments to infuse liquidity in the system. Following this, banks had reduced interest rates on their fixed deposits.

State Bank of India, for example, now pays interest of 5.9% across its fixed deposits (FD) between one and 10 years. The interest rates on small savings instruments are much higher. Between FDs of one and five years, the rates are between 6.9% and 7.7%. On the monthly income scheme (MIS), the rates are 7.6%. Senior Citizen Savings Scheme fetches depositor 8.6%. Public Provident fund gives 7.9% returns.

“Small savings scheme rates should have come down earlier. But they did not. The cut is imminent, but there could be a marginal downward revision. There won’t be a significant cut. Money from small savings scheme is an off-balance sheet liability for the government. In his extraordinary circumstances, the government would continue to use those funds," said Soumya Kanti Ghosh, group chief economic adviser at SBI.

Madan Sabnavis, chief economist at CARE Ratings, agreed, saying there could be a token rate cut of 25-30 bps after RBI measures. One basis point is one-hundredth of a percentage point.

“The scheme is meant for people in the low-income group. Many rely on the interest on small savings scheme to manage their monthly expenses. The cut would happen but not more than 25-30 bps," he said.

Bankers in the past have said they were unable to lower lending rates as they had to keep FD rates high because they compete with small savings scheme. Sabnavis, however, said FD depositors and those who invest in small savings schemes are different as the data suggests both have been growing.

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