Small savings rates may be cut by 50-100 bps from April 1

Interest rates on small savings schemes could be reduced by 50 to 100 basis points (bps) with effect from April 1. Henceforth, the interest rate would also be reset on a quarterly basis instead of yearly basis. An official announcement in this regard is expected in a day or two.

Banks have long cited high small savings rates as one reason for their inability to fully transmit interest rate cuts by the Reserve Bank of India.

Without mentioning how much the reduction would be in the interest rates, economic affairs secretary Shaktikanta Das said the spread of 25 bps (above the average yield from government securities with similar maturity) available now for the small saving schemes of tenure below five years, would be “reduced.”

This could mean that interest rates for 1-3 year postal deposits, for instance, could come down by about 60-100 bps to 7.2-7.6% from the current 8.4%, depending on the quantum of reduction in the spread. The average yield of 1-3 year G-secs were 7.2-7.5% in October-December 2015.

The rates for small savings are currently linked to the average yield existed of G-secs of similar maturities in 2014-15, with a 25 bps spread.

Das said, “for long term saving schemes (other than the girl child and senior citizen schemes) of above five years, the spread will be protected because the government has taken into consideration the interest of the small savers and the need to encourage long term savings.” However, even if the spread is maintained for these long-term savings, the interest rate on products such as the popular PPF and National Small Saving Certificates could come down by 0.5-0.8% as yields on government securities of comparable tenures have declined over the past year, analysts say. For example, interest on PPF could slip to 7.92% from 8.7% in the upcoming revision after factoring in a 25 bps spread over the 15-year G-sec yield of 7.8% in October-December quarter.

Though small savings rate are usually determined to be 25 bps above the average yield from government securities with similar maturity in the previous year, there are three instruments that carry even higher spreads: Sukanya Samriddhi Account (75bps), Senior Citizens Savings Scheme (100bps) and the NSC (50 bps). Once the rates are announced, bank deposit and lending rates are also expected to fall.

Source: http://www.financialexpress.com/