Govt paying higher interest on small savings: RBI

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The RBI has said that the government is paying 47-178 basis points (100 basis points equal a percentage point) higher in the public provident fund’s parking funds, and National Savings Certificate or term deposits in post offices, after holding small savings rates for the past six quarters, as per a report in The Times of India. Interest rates on small savings accounts are adjusted every quarter in accordance with an agreed-upon formula that provides a premium over the average yield on government bonds for a comparable scale of maturity.

For example, a 25-basis point spread is permitted in the immensely popular PPF, which has a 15-year lock-in period.

According to RBI, the government should be offering 6.63 % in the current quarter after factoring in the average yield of 6.38% on G-secs with comparable maturities, but is instead paying 7.1%.

The profits are larger because you can invest up to Rs 1.5 lakh per year in many plans and get tax benefits.

The deposit rates fell by up to 180 basis points across shorter maturities (up to one year) between March 2020 and September 2021. The weighted average domestic term deposit rate falling 135 basis points (March 2020 to August 2021).

The foreign banks have decreased deposit rates by up to 195 basis points between March 2020 and September 2021, in comparison to state-run players that are giving 85-157 basis points lower rates, depending on the duration.

Lending rates have also fallen during this time, with the one-year median marginal cost of funds-based lending rates for scheduled commercial banks falling by 103 basis points as the cost of funds plummeted.