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Rate cut jolt likely for seniors
Annapurna Singh
DHNS
Last Updated IST
Image for representation
Image for representation

In yet another jolt to households, especially senior citizens, who depend on interest earned from deposits, the government is likely to cut interest rates on small savings like public provident fund (PPF), Kisan Vikas Patra and senior citizens’ savings schemes when they are reviewed later this month.

The finance ministry will, in all likelihood, accept the Reserve Bank of India’s suggestion in this regard for a better pass through of key interest rate cuts by the central bank.

High interest rates on small savings prohibit banks from cutting interest rates on their fixed deposit, which in turn hinders loan rates from going down.

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The Centre, which has emerged as the biggest borrower from this fund, has kept interest rates artificially high to generate more money in the fund. But high interest rates on such schemes have also come in handy for generating more demand at a time when India is going through one of the worst consumption slowdowns in decades.

Small savings instruments are a lifeline for senior citizens and retirees too, who depend on the interest income of such schemes to meet their financial needs in the absence of a government-enabled social security scheme.

However, banks lose while the government and households gain. It is difficult for lenders to compete against the administered rate on small savings. Hence, the RBI recently suggested to the finance ministry that if the government brought down interest rates on small savings, it would be easy for lenders to reduce lending rates as well.

Interest rates on small savings schemes are reset by the finance ministry before each quarter and they depend on government bond yields in the previous quarter. However, they have not been revised since July this year.

High interest rates on small savings make it difficult for banks to build their deposit base. For example, the interest rate on 2-5 year fixed deposit with the State Bank of India is currently 6.25% for regular deposits and 6.75% for senior citizens. This is way lower than 7.5% offered by small savings deposits of similar nature.

The government had last revised the interest rates on small savings in June this year, when it was reduced by 10 basis points or 0.1%. Thus, the interest rate on PPF and five-year NSC came down to 7.9% from 8%. The rate on Sukanya Samridhi Yojana, the scheme for the girl child, had been brought down to 8.4% and, senior citizen’s scheme to 8.6%.

RBI Governor Shaktikanta Das, however, had said during the monetary policy review that the government should have brought down interest rates in the September quarter.

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(Published 11 December 2019, 00:23 IST)