Government withdraws order on rate cut on small savings schemes

Hours after notifying significant cuts in small savings instruments’ returns for this quarter, the government has backtracked on these sharp cuts. This is the first time that the Centre has scrapped the notified interest rates on small savings schemes after switching to a quarterly interest rate setting system in April 2016.

The government appears to have had a rethink owing to a sharp backlash on social media about the middle class being squeezed. Retail inflation has been breaching the 6% mark and the government has also decided to tax Employees PF savings starting this year.

“Interest rates of small savings schemes of GoI shall continue to be at the rates which existed in the last quarter of 2020-2021, ie, rates that prevailed as of March 2021. Orders issued by oversight shall be withdrawn,” Finance Minister Nirmala Sitharaman said in a tweet early Thursday morning.

The government resets the interest rate on small savings instruments every quarter, but this round of rate cuts was significant after three quarters of the rates being left untouched. The last round of rate reductions was in the April to June quarter of 2020, when small savings rates had been cut between 0.5% and 1.4%.

The rates notified on Wednesday night for the April to June 2021 quarter were 40 basis points (0.4%) to 110 basis points (1.1%) lower on various instruments.

The sharpest cut was proposed in the quarterly interest rate paid on one year term deposits, from 5.5% in the January to March quarter to 4.4% in this quarter. The rate of return on the Senior Citizen Savings’ Scheme was cut from 7.4% to 6.5%, while the Sukanya Samriddhi Account Scheme’s return was reduced from 7.6% to 6.9%.

The rate of return on the popular Public Provident Fund (PPF) scheme was reduced from 7.9% to 7.1% last April and further slashed to 6.1% for this quarter, before the minister announced the rollback on Thursday morning.

The interest rate paid on National Savings Certificate and Kisan Vikas Patra were also reduced significantly, from 6.8% to 5.9%, and from 6.9% to 6.2%, respectively. Consequently, the Kisan Vikas Patra, which used to mature in 124 months, was to mature in 138 months.

It remains to be seen if holding the rates at the same level will hurt the government’s hopes of executing its borrowing plans for the year at lower interest rates and if the same extent of rate cuts will now be effected in the June to September quarter.