Too little, too late, and tied to elections

The recent increases made by the government in the interest rates of a few small savings schemes for the ongoing October-December quarter are too little, too late. The rates payable on five small savings instruments, including the senior citizens’ savings scheme, Kisan Vikas Patra and time deposits for two and three years, saw minor hikes of 0.1% to 0.3%. The rates were left unchanged for seven other designated schemes, including the Public Provident Fund (PPF) and National Savings Certificate (NSC). The PPF now fetches 7.1%, and the NSC yields 6.8%. Interest rates on small savings schemes are usually reset on a quarterly basis, in line with the movement in benchmark government bonds of similar maturity. But the selective rate hikes have come after keeping the rates unchanged for nine consecutive quarters. The interest for the Employees’ Provident Fund (EPF) is the lowest in four decades.

Though the rates are typically linked to yields on benchmark government bonds, the government had not changed the interest rates over the last two years in accordance with the movement in G-Sec yields. The Reserve Bank of India (RBI) has raised the benchmark lending rate by 140 basis points since May, in response to the rising inflation figures, prompting banks to raise interest rates on deposits as well. Though the yields from government securities have been rising, the government has not raised the rates on small savings as per norms. The RBI noted in August that the small savings rates are behind what they should be. It has also said that with G-Sec yields moving higher, the prevailing interest rates on various schemes are below the formula-implied rates for the quarter.

The changes have come when the inflation rate has been high for months, staying constantly above 6%. It has touched 7% also. Since interest rates are less than the inflation rate, the return on savings have been negative for many months. The government’s calibration of small savings rates have had more to do with elections than with G-Sec yields or the inflation rate. The last rate hike was in January 2019, before the Lok Sabha elections. In March last year, the government cut the rates but withdrew the decision the very next day -- elections were going to be held for five state Assemblies very soon. The latest hike, though small, has come when another election cycle is about to start. The government should realise that the mismatch between savings rates and inflation will have consequences not only on individual and family budgets but for the economy, too. It will affect the savings rate, which is important for capital formation in the economy.