Why in news?
The Centre has announced increases of 30-50 basis points in rates of post office savings schemes for the upcoming October-December quarter.
Why is the rates revision?
- The Shyamala Gopinath panel was set up in 2010 to recommend, besides others, on ways to make small saving plans more market-linked.
- Based on these recommendations, interest rates on small savings schemes are reviewed before the end of every quarter.
- Accordingly, the new rates are announced for the next quarter.
- The revised rates mean that fresh deposit between October 1 and December 31 will get higher interest.
What were the key changes?
- The rates are revised for Small saving schemes such as Public Provident Fund (PPF), National Savings Certificates and Post Office Deposit Scheme.
- Rates on short-term deposits are increased by 30 bps (100 bps is 1 per cent).
- Higher increases of 40 bps were reserved for special schemes such as the -
- Post Office Monthly Income Scheme
- Sukanya Samridhhi
- Kisan Vikas Patra
- Public Provident Fund
- National Savings Certificates
- Senior Citizen Savings Scheme (SCSS) saw an increase of 50 bps.
How will it help?
- Banks - Indian banks have always delayed passing on market interest rate increases to their depositors.
- On the other hand, they transmit rate increases promptly to their borrowers.
- Bank deposit rates have climbed by just 50 bps in the past year.
- But government security yields have jumped by 100-140 bps.
- Post office term deposits are now set to offer 6.9 to 7.8% for one- to five-year tenors.
- This will make the banks raise their low deposit rates of 6.25-7.25 %.
- Hence the move, essentially, realigns the returns to small savers with prevailing market interest rates.
- Savings - The latest RBI Annual Report showed that in FY18, household savers halved their incremental deposits with banks.
- But they doubled their holdings of hard currency and raised their equity and mutual fund bets fourfold.
- So the higher rates on small savings schemes will hopefully discourage savers from hoarding cash.
- This will also prevent them from taking uninformed bets on equity or hybrid mutual funds, without understanding the risks.
- The move may mean increased borrowing costs for the Centre.
- However, it sends out the right signals to the market as well as investors engaged, in reallocating their financial savings.
Source: BusinessLine
