As the Reserve Bank of India’s (RBI) decision to reduce the benchmark policy repo rate by 25 basis points, the finance ministry may evaluate the possibility of lowering interest rates for small savings schemes in the upcoming financial year, according to a government official, as per a Moneycontrol report.
On Friday, the RBI’s Monetary Policy Committee (MPC) reduced interest rates by 25 basis points, bringing the rate down to 6.25 per cent from 6.5 per cent, marking the first cut in nearly five years.
“There will be more liquidity. You should expect a reduction in your bank fixed deposit. So far, small savings offers the highest rates for small investors. Mahila Samman interest rate is 7.5 percent. On 31st of March, repayment for the two years would be due for Mahila Samman. Next year, we have to start paying back the people who have deposited. If they have deposited in the first year, their repayment becomes due next year,” a senior government official said, indicating a possible review of small savings rates, according to the report.
The small savings rate will be reviewed, with the new rate set to be announced before April 1, 2025.
On December 31, the Finance Ministry decided to keep the interest rates on various small savings schemes unchanged for the quarter starting January 1, 2025. This marked the fourth consecutive quarter with no changes to these rates.
The central government sets the interest rates on small savings schemes, primarily managed by post offices and banks, on a quarterly basis.
While the government determines the interest rates, they are linked to market yields on government securities, with a spread of 0-100 basis points above the yields of comparable maturity securities. As a result, when market yields on government securities decline, interest rates on small savings schemes are usually reduced.
However, the connection between small savings interest rates and government securities yields has weakened over time.
