The Centre on Thursday kept unchanged the interest rates for various small savings schemes for the September quarter, contrary to analysts’ expectation that they could be raised in sync with the rising yields on government securities. With this, the government has held the small savings rates for over two years now.
Analysts said the move to retain the small savings rates for Q2FY23, despite the repo rate having already been hiked by 90 basis points since May, only reinforces what banks have been saying—that these rates were kept at elevated levels for long. Moreover, the government also probably believes that it will still have the desired level of funds from the National Small Savings Fund (NSSF) to finance a part of its wide fiscal gap, said the analysts.
Interestingly, the Reserve Bank of India is widely believed to go for a third round of rate hike this fiscal in August, which will probably force the government to revise up the small savings rates for the October-December period. A robust collection under the NSSF reduces the government’s reliance on market borrowing to fund the fiscal deficit.
Interest rates are typically pegged to the yields on comparable government securities, which have hardened in recent months. However, despite the rise in G-sec yields, the government chose to retain the small savings rates.
Icra chief economist Aditi Nayar said the average month-end G-Sec yields for one-year, two-year and 5-year bonds had increased substantially to 5.26%, 5.65% and 6.79%, respectively, during the March- May period, from 3.88%, 4.72% and 6.0%, respectively, in the December 2021-February 2022 period, as well as 3.50%, 4.41% and 5.69%, respectively, during September 2021-November 2021 period.
The government has budgeted its offtake from the NSSF to drop to Rs 4.25 trillion in FY23 from a record Rs 5.92 trillion in FY22. Analysts, however, now expect its offtake from the NSSF to rise in FY23 from the budgeted level.
The interest rates on Public Provident Fund (PPF), Kisan Vikas Patra Scheme and the Sukanya Samriddhi Account Scheme have been retained at 7.1%, 6.9% and 7.6%, respectively, for the April-June period, according to a notification by the finance ministry. Similarly, the interest rate on one-year, two-year, and three-year time deposits have also been maintained at 5.5%.
Interests on the five-year term deposit, recurring deposit, senior citizens savings scheme have been kept at 6.7%, 5.8% and 7.4%, respectively.
The government had last cut the small savings rates (in the range of 70-140 basis points) in the first quarter of FY21. These rates are notified every quarter.
Last year, the Centre was forced to reverse swiftly a proposed cut in interest rates on small savings schemes, ostensibly to not upset middle-class voters amid Assembly polls in states like West Bengal and Assam.