The sharp reduction in small savings rates, which was to take effect from today, has been withdrawn by the government.
Finance Minister Nirmala Sitharaman said Thursday morning that the “orders issued by oversight shall be withdrawn”. The government had on Wednesday cut interest rates on various small savings schemes sharply by 40-110 basis points. The revised rates were to come into effect from April 1 and remain in effect till June 30.
“Interest rates of small savings schemes of GoI (Government of India) shall continue to be at the rates which existed in the last quarter of 2020-2021, ie, rates that prevailed as of March 2021. Orders issued by oversight shall be withdrawn,” Sitharaman said in a tweet at 7.54 am.
Small saving rates are linked to yields on benchmark government bonds, which have fallen over the last one year as the Reserve Bank of India cut rates to support the economy.
In a circular on Wednesday, the Finance Ministry said the interest rate on savings deposits has been reduced to 3.5 per cent from 4 per cent for the first quarter of 2021-22. Rates on time deposits were also slashed significantly.
Among the most popular fixed income products, Public Provident Fund (PPF) was to fetch a rate of 6.4 per cent, down from 7.1 per cent earlier. National Savings Certificate (NSC) was to yield 5.9 per cent, down from 6.8 per cent earlier, while rates on the girl child savings scheme Sukanya Samriddhi Yojana would fall to 6.9 per cent from 7.6 per cent earlier.
One-year time deposit rates had seen the steepest cut of 110 basis points to 4.4 per cent from 5.5 per cent. The rates on two, three and five year time deposits had also been reduced by 40-90 basis points.
The Finance Ministry’s circular came at a time when inflation was inching up. Latest retail inflation data released by the government showed the headline number rising to a three-month high of 5.03 per cent in February from a 16-month low of 4.06 per cent in January.
The lowering of interest rates would have helped the government reduce costs, but would have hurt investors, particularly senior citizens and the middle-class.
Interest rates on small savings schemes are reset on a quarterly basis, in line with the movement in benchmark government bonds of similar maturity.
For the April-June quarter in 2020, the finance ministry had cut interest rates on small savings schemes by up to 140 basis points. This had been kept steady for the last three quarters.
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. In the 2020-21 Revised Estimates, the government estimated it would raise Rs 4.8 lakh crore through small savings, against the budget estimates of Rs 2.4 lakh crore. In 2021-22, borrowings through small savings have been pegged at Rs 3.91 lakh crore.