Government keeps small savings plan interest rate unchanged for first quarter of FY23

To relieve the middle class and small savers, the Ministry of Finance on Thursday left interest rates on government-guaranteed savings instruments unchanged for the first quarter (April-June) of FY23. came days after the interest rate on Employees Provident Fund (EPFO) deposits was cut to a four-decade low of 8.1% in FY22 from 8.5% the previous year.

The rising rate of inflation and the growing chances that the Reserve Bank of India will reverse its accommodative policy, which could lead to higher interest rates, may have prevented the government from cutting savings rates for small.

“The interest rate of the various small savings plans for the first quarter of the financial year 2022-23 from April 1, 2022 and ending on June 30, 2022 remains unchanged compared to the current rates applicable for the fourth quarter. (January 1, 2022 to March 31, 2022) of the 2021-22 financial year. This has the approval of the competent authority,” the Department of Economic Affairs of the Ministry of Finance said in a statement.

Among the main savings instruments supported by the government, interest rates on national savings certificate, savings schemes for the elderly, public provident fund scheme, Kishan Vikas Patra, Sukanya Samriddhi’s account remained unchanged at 6.8 percent, 7.4 percent, 7.1 percent, 6.9 percent, 7.6 percent respectively for the April-June quarter.

Aditi Nayar, chief economist at ICRA Limited, said that with the rise in government securities yields over the past three months, as well as the gradual increase in bank deposit rates, she had forecast a low probability that the small savings rates are revised upwards for the coming quarter. “We expect a shallow rate hike cycle to begin in mid-2022, with 50 basis points of repo hikes over August-October 2022, which could then be reflected in low savings rates noted,” she added.

A year ago, on March 31, 2021, the Department of Finance cut interest rates for small savers but reversed the decision overnight blaming the decision on an oversight after the cuts sparked a outcry on social media ahead of Assembly elections in West Bengal.

The high interest rates of these systems are frequently blamed by banks for their inability to reduce lending rates. They argue that lower rates on small savings schemes would allow them to better pass on key rate cuts from the central bank. High short-term interest rates on small savings schemes are forcing banks to align interest rates on their deposits as well, preventing them from drastically reducing lending rates alongside lower policy rates. After RBI raised concerns about the limited transmission of its policy rate cuts, the Ministry of Finance launched modest quarterly savings rate reviews, starting April 1, 2016, making the process more dynamic and linked to the market.

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