0.1619
900 319 0030
x

Hike in Small Savings Interest Rates

iasparliament Logo
September 24, 2018

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 -
  1. Post Office Monthly Income Scheme
  2. Sukanya Samridhhi
  3. Kisan Vikas Patra
  4. Public Provident Fund
  5. 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

Login or Register to Post Comments
There are no reviews yet. Be the first one to review.

ARCHIVES

MONTH/YEARWISE ARCHIVES

Free UPSC Interview Guidance Programme