The government will review the small savings rates in order to facilitate transmission of Reserve Bank of India’s 50 basis points repo rate cut announced on Tuesday.
Finance Miister Arun Jaitley however did not outline a deadline for reviewing small savings rates. “Don’t bind them in time limit. We will do it in due course,” Mr Jaitley said.
This could bring down the interest rates on small savings instruments like public provident fund (PPF), post office deposits, Senior Citizens Savings Scheme; National Savings Certificates Kisan Vikas Patra and Sukanya Samriddhi scheme.
Bankers have long complained that high interest rates on these small savings schemes prevent them from lowering their deposits rates significantly.
For example, PPF fetches interest rate of 8.7 per cent while Senior Citizens Savings Scheme offers 9.3 per cent. In contrast, SBI’s 5-to-10 year deposits offer 7.25-7.5 per cent return. Small savings Schemes are linked to yields on government securities of comparable maturity.
Before Tuesday’s repo rate cut, the median base lending rates of banks had fallen by only about 30 basis points despite75-basis-point cut the RBI.
RBI chief Raghuram Rajan said that the central bank will work closely with the government for faster transmission of its cumulative 125 basis points rate cut by financial institutions.
In addition to the cut in repo rate, Dr Rajan also announced increase in the limit on foreign investments in government bonds by Rs 1.2 lakh crore ($18.13 billion) by March 2018 in stages. Currently, the limit is $30 billion.
The higher limit will help to bring down yields on bonds, and thus overall rates, said chief economic advisor Arvind Subramanium.
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