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All it took was less than 12 hours for the Union government to reverse the previous night’s steep reduction in small savings schemes’ interest rates, blaming the decision on an oversight after the cuts set off a social media uproar amid hotly contested state elections.

Finance minister Nirmala Sitharaman tweeted early on Thursday: “Interest rates of small savings schemes of GoI shall continue to be at the rates which existed in the last quarter of 2020-2021, i.e., rates that prevailed as of March 2021. Orders issued by oversight shall be withdrawn."

On Wednesday night, the government cut interest rates in Public Provident Fund (PPF) to 6.4% from 7.1%, National Savings Certificate (NSC) to 5.9% from 6.8%, Senior Citizens Savings Scheme to 6.5% from 7.4% and the Sukanya Samriddhi Scheme to 6.9% from 7.6%, besides increasing the tenure of Kisan Vikas Patra from 124 months to 138 months, which translates to a reduction to 6.2% from 6.9%.

Diminishing returns
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Diminishing returns

Thursday’s decision comes as a major relief for hundreds of millions of Indians who park money in these schemes. The high interest rates of these schemes are frequently blamed by banks for their inability to reduce lending rates.

One reason for the government’s swift change of mind could be elections in West Bengal, the biggest contributor to small savings schemes. The state voted on Thursday in the second phase of ongoing assembly elections. According to the latest data available from the National Savings Institute, out of gross small savings schemes collections of 5.96 trillion in FY18, the state brought in the highest amount at 89,992 crore, or 15% of the total collections, followed by Uttar Pradesh, Maharashtra and Gujarat. In West Bengal, the Bharatiya Janata Party is fighting to wrest power from incumbent chief minister Mamata Banerjee’s Trinamool Congress, which is in power for the past 10 years.

Former finance minister and Congress leader P. Chidambaram tweeted that the announcement of changes in interest rates is a regular exercise, and there is nothing “inadvertent" about its release on 31 March. “The BJP government had decided to launch another assault on the middle class by slashing interest rates and profiting itself. When caught, the FM is putting forward the lame excuse of ‘inadvertent error’. When inflation is at about 6% and expected to rise, the BJP government is offering interest rates below 6%, hitting the savers and the middle class below the belt," he said.

Communist Party of India (Marxist) leader Sitaram Yechury tweeted: “Taking the order back is not going to fool anyone. Their (the government’s) intentions are clear. Cronies’ incomes are growing into trillions, but the majority are squeezed and destroyed."

Lower rates on small savings schemes, however, would have allowed banks to better pass on policy rate cuts by the central bank. High short-term interest rates on small savings schemes force banks to match interest rates on their deposits as well, preventing them from significantly cutting loan rates in tandem with policy rate cuts. After RBI raised concerns about limited transmission of its policy rate cuts, the finance ministry started quarterly reviews of small savings rates, beginning 1 April 2016, making the process more dynamic and market-linked.

Yet, for a large section of the middle class who are averse to investing in the riskier equity market, small savings instruments give assured returns.

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