Government cuts interest rates on small savings

New Delhi, June 28 (IANS) The government has reduced interest rates of small savings schemes by 10 bps for the July to September quarter.

"On the basis of the decision of the government, interest rates for small savings schemes are to be notified on a quarterly basis," the Finance Ministr y said while notifying the rates for the second quarter of financial year 20 19-20.

The Centre had changed small savings rates in the last quarter (January-March) of FY19. The rates were left unchanged in the April-June quarter of FY2 0, ahead of Lok Sabha polls in April-May, despite government bond yields in the secondary market declining 29 bps in the same period.

The interest rates on public provident fund (PPF) and other small savings instruments have been cut in line with falling interest rate across the financial system.

Barring interest on savings deposits, which has been retained at 4% annually, the government on Friday reduced interest rate on small savings schemes, including N SC and PPF, by 10 basis points for the July-September quarter. The Reserve Bank of India has cut interest rate by 75 basis points since the start of this year while many banks have also lowered their fixed deposit or FD rates.

The interest rate on small savings schemes including PPF, which are revised on a quarterly basis, had seen a sharp hike in October-December quarter and since then they had remained steady.

The girl child savings scheme Sukanya Samriddhi Account will fetch 8.4%, from 8.5%. For the July-September quarter, PPF and National Savings Certificate will fetch an annual interest rate of 7.9% as compared to 8% earlier while Kisan Vikas Patra (KVP) will yield 7.6% with maturity of 113 months.

At present, interest rate on KVP is 7.7% and maturity is 112 months.

Post office term deposits of 1-3 years will fetch interest rate of 6.9%, to be paid quarterly, while the five-year quarterly pegged at 7.7% and for recurring 7.2% from existing rate of 7.3%.

Interest rate for the five-year Senior Citizens Savings Scheme will now fetch a lower rate of interest at 8.6% from 8.7%.

The government hopes that cutting interest rates for small savings schemes will push banks to lower their rates as well, which have been hitherto reluctant to lower rates, citing higher rates for small savings schemes.

The Reserve Bank of India has cut interest rate by 75 basis points since the start of this year while many banks have also lowered their fixed deposit or FD rates. The interest rate on small savings schemes including PPF, which are revised on a quarterly basis, had seen a sharp hike in October-December quarter and since then, they had remained steady, making the banks harden theor stand on cutting rates.

The move is aimed at matching the softening of interest rates in the banking sector since the RBI cut its benchmark policy rate thrice during the year. "On the basis of the decision of the government, interest rates for small savings schemes are to be notified on a quarterly basis," the Finance Ministry said while notifying the rates for the second quarter of financial year 2019-20.

Every quarter, since April 2016, the government has been setting interest rates on small savings schemes to align it with market rates. In the last one year, it has tweaked rates twice, with the October-December quarter seeing a hike of 30-40 bps.

Interest on post office savings deposits has been retained at 4% annually.