Small savings: Leave rates unchanged

The government has left the interest rates on various small savings instruments unchanged since Q2 of FY21 that implies a bigger interest burden on the government, the Reserve Bank of India has pointed out in its October 2021 bulletin. The present rates of small savings schemes such as PPF, Sukanya Samriddhi, monthly incomes schemes are 47-178 basis points (bps) higher than the formula-based rates for Q3 of FY22. :2021-22. Interest rates for small savings schemes are to be updated quarterly in accordance with an approved formula that provides a spread over the average yield on comparable government securities.

For example, a 25-basis-point spread is permitted on PPF, which has a 15-year lock-in period. After adjusting for the average yield of 6.38 % on comparable G-secs, the government should be offering 6.63 % in the current quarter instead of paying 7.1%, the RBI stated. With interest rates on bank deposits declining and interest rates on small savings remaining unchanged, the latter has grown more attractive to depositors. Since 2018, the rise of accretions under small savings has continuously outpaced that of bank deposits, and the gap has grown, with repercussions for monetary transmission as and when credit demand picks up.

However, the policy of holding the interest rates on small savings has provided some relief to the unprecedented financial stress to a large section of the common people who have suffered job losses, slashed wages and ruined businesses since end-March 2020 on a mammoth scale. Many had their fortunes wiped out by sudden and completely unexpected medical expenses.

A drop in small savings schemes interest rates now will negatively impact a huge number of people who always try to save a part of their earnings and invest in safe instruments for the future. Small savings that enjoy the backing of the government enjoy the trust of millions from the poor, lower-middle and middle-class people. The government should not think of slashing interest rates at least till the end of the current financial year.