New Delhi : The finance ministry today said it will cut interest rates on some small savings schemes, including 1-3 year postal term deposits and Kisan Vikas Patra, by removing the norm on minimum spread between the yields on such instruments and government securities.

The new rates, effective from the next financial year, will be notified on Mar 15, the ministry said in a release. “This (revision) is expected to help the economy move to a lower overall interest rate regime eventually and thereby help all, particularly low-income and salaried classes,” the release said. The minimum spread of 25 basis points between 1-3 year term deposits, Kisan Vikas Patra and 5-year recurring deposits over comparable government securities, will be removed with effect from Apr 1, the ministry said.

The revision in interest rates on small savings will be reviewed every quarter, it said.

The government has decided to cut interest on some small savings rates in order to facilitate monetary policy transmission. Banks have been arguing that administered interest rates on small saving schemes were hindering transmission of rate cuts, by acting as a floor below which bank deposit rates cannot be cut.

The interest rates on small savings schemes currently range between 8.4% and 9.3%, whereas banks give 7.5-8.0% on a five-year fixed deposit. The 25-basis-point spread between long-term instruments such as the five-year term deposit, five-year National Savings Certificate and Public Provident Fund will remain unchanged.

“These schemes are particularly relevant to the self-employed professional and salaried classes. This will encourage long-term savings,” the release said.

The finance ministry also said that interest rates and spread of savings schemes based on social development or social security goals like girl child scheme, senior citizen savings scheme and monthly income schemes will also remain unchanged.

“The small savings interest rates are perceived to limit the banking sector’s ability to lower deposit rates in response to the monetary policy of the Reserve Bank of India,” the release said, adding, reducing these rates would help the economy move towards a lower interest rate regime eventually.

The RBI has reduced its repo rate by a total of 125 bps since January last year, but banks have transmitted only 60-70 bps in their lending rates so far.

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Govt: Small savings rate cut to help economy move to lower rate regime

Aligns small savings rates to govt securities
Small savings rates to be recalibrated quarterly
Removes 25 bps spread between 5-yr recurring deposit, gilts & between Kisan Vikas Patra, gilts

5-year Natl Savings Certificate-gilts left unchanged at 25 bps
Govt: Taken view on small savings to aid interest rate transmission


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