Hike in Small Savings Interest Rates

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 -

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