Nov 042015

Government to Link Small Saving Scheme’s Interest Rate to The Repo Rate

If you are one of the many investors of India, who likes to invest a large chunk of your money in the small saving schemes because of the high interest rates it provide, it is time to redesign your portfolio. The government has announced that the interest rates of all the small saving schemes Like PPF will be assessed after the repo rate cut by RBI.

The talks are going on to lower the interest rates of these small saving schemes to match those of the deposit rate of banks or the repo rate. As of now the rate of the small saving schemes are based on the government securities of the comparative maturity.

small saving schemes

The difference in the interest rate of the bank’s fixed deposit and small savings is more than ninety bps. This has resulted in the reluctance of banks to reduce their deposit rates, in comparison to the RBI’s reduction rate. As such, the lending rates of the banks are also much higher as compared to the Central Banks rate.

This move will help in aligning the interest rates of small savings such as PPF to the market rates. Those who are supporting the move are arguing that back in the financial year 2011 to 2014, inflation had been on the higher side, affecting the real interest rates. However, the inflation rate has declined significantly and the real interest rate is probably higher than it should be. As such a correction in the interest rate of these small saving schemes is a necessity. Linking it to market will allow for more flexibility.

However, there are also those who do not support this move by stating that it may adversely affect the saving behavior of the people. The arguments are also placed that if the interest rates on the small saving schemes are reduced, there are high chances of people getting enticed into investing fake schemes, promising higher returns. This decision has also been considered by many as a government’s move to discourage saving and move to consumerist economy.

All in all, this move by the government is still under discussion phase and the government is finding out the best option to effectively reduce the rate without having a significant impact on the saving behavior of the people. The government has also added that it will discuss the ways to safeguard the interest of the senior citizens of the country as well as the female child while lowering the interest rates on these saving schemes.

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