The Indian government has recently slashed the interest rates on all small savings schemes, including Public Provident Fund (PPF), by 60 basis points, and Kisan Vikas Patra (KVP), by 90 basis points, to create conducive environment for the Reserve Bank of India (RBI) to ease monetary policy rates further, and help banks transmit rate cuts to customers.
The new interest rates for the 12 small savings schemes, including term deposits of one to five years' maturity, five-year recurring deposit, five-year Senior Citizen Savings Scheme, five-year Monthly Income Scheme, Sukanya Samriddhi Account Scheme, and National Savings Certificate, the new rates will come into effect on April 1 and will be valid till June 30.
The decision is aimed at aligning these administered interest rates closer to the market rates. The interest rate on PPF scheme will be cut to 8.1% for the period April 1 to June 30, from 8.7%, at present, similarly, the interest rate on KVP will be cut to 7.8% from 8.7%, even the popular five-Year National Savings Certificates will earn an interest rate of 8.1% from April 1 as against 8.5%, at present. A five-year Monthly Income Account will fetch 7.8% as opposed to 8.4% now. Girl-child saving scheme, Sukanya Samriddhi Account will see interest rate of 8.6% as against 9.2%.
The opposition came down hard on the government for slashing the interest rates on small savings, including PPF, dubbing it as yet another assault on the middle class. "Slashing interest rates on small savings - on PPF and KVPs, is yet another assault by the Modi Govt on hard working middle class people", says the opposition.
However, the Finance Minister Arun Jaitley defended the government's decision to slash interest rates on PPF and national small savings, saying this was part of a routine procedure. "The way economy is moving today, we cannot have a situation where lending rates are going down but deposit rates remain high," says Arun Jaitley. He also said the move will help transform the economy from a "sluggish" state to an "efficient" one.
The Executives of public sector banks said the recent announcement will facilitate the banks to create more space to reduce interest rates on deposits further. The substantial cut in rates for PPF and KVP, will nudge banks to move for lower interest rate regime. This would also create room for RBI to reduce the key policy rate (repo rate) by equivalent magnitude. According to RBI, the interest rates on one-year term deposits have come down by about 85-100 basis points in past 12 months. According to D K Joshi, chief economist of CRISIL, the present decision reduces rigidities in interest rate regime in India. However, the actual effect may be visible only in the next financial year only.
The small savings rate will be changed every quarter from next fiscal year, starting in April, to shift them closer to market interest rates.