The government is weighing a proposal to reduce the interest rates for small savings schemes for the first time in two years for the June quarter, in sync with its latest move to trim the rate for the Employees’ Provident Fund Organisation (EPFO) deposits, a senior official told FE.
A final decision on the interest rates for the first quarter of FY23 will be taken by the finance ministry by Thursday.
“There is a case for a reduction in small savings rates. Keeping them artificially high for long only distorts the broader interest rate climate. That was one of the reasons why the EPFO rate for FY22 was recently cut to 8.1% from last fiscal’s 8.5%. Of course, there are arguments to the contrary as well,” said the official quoted above.
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.
Of course, a section of policymakers and analysts feel the rates need to be retained at the current elevated levels, given the rising interest rate scenario globally. This will also encourage greater inflows into the National Small Savings Fund (NSSF), which can then be tapped more aggressively for partially funding the fiscal deficit while proportionately reducing the Centre’s record market borrowing plan for FY23, they reckon.
A member of the parliamentary standing committee on finance said: “We need to wait a little longer to get more clarity. People have already seen income losses following the pandemic. The interest rates are also going to rise globally. In such a situation, the small savings rates should not be cut. Moreover, the inflows can be utilised to finance fiscal deficit.”
The government has budgetted the gross market borrowing at Rs 14.95 trillion for FY23, compared with Rs 10.47 trillion in FY22. Accordingly, its offtake from the small savings scheme is budgeted to drop to Rs 4.25 trillion in FY23 from a record Rs 5.92 trillion in the current fiscal. Any reduction in market borrowings by the Centre in times of global liquidity tightening will not just weigh on bond yields but also allow states greater leeway to pursue their own borrowing plans without fears of getting crowded out by the central government, said a top banker.
However, those who favour a rate reduction argue that elevated costs of small savings funds have not just dented the exchequer but also forced banks to refrain from trimming their deposit rates beyond a point. Consequently, lenders have been reluctant to pass on the benefits of monetary transmission to borrowers as much as they should have, even though the Covid-hit economy has clearly been in need of a massive credit push to turn the corner, a senior executive with a large state-run bank said.
For instance, while the small savings interest rate on five-year time deposits has been kept high at 6.7%, the five-year G-sec yield stood at 5.79% on Tuesday, he said. The two-year time deposits fetch as much as 5.5%, while the yield on G-secs with the same tenure stood at 4.52% on Tuesday.
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.
The interest rates on Public Provident Fund (PPF), Kisan Vikas Patra (KVP) Scheme and the Sukanya Samriddhi Account Scheme have been kept at 7.1%, 6.9% and 7.6%, respectively, for the January-March period of this fiscal.
Icra chief economist Aditi Nayar said with the rise in G-sec yields over the last three months, the government is unlikely to reduce the small savings rates. “Deposit rates of banks have also started inching up. We expect a shallow rate hike cycle to commence in mid 2022, with 50 basis points of repo hikes,” she said.
DK Pant, chief economist at India Ratings, said: “Small savings rates are linked to yields on government securities. Since the gap is narrowing, chances of small such rates remaining the same are high.”
