The government raises interest rates on several small savings programmes by 20-110 basis points for the period January-March

The finance ministry increased interest rates on various small savings programmes for the January-March quarter, marking the second quarterly increase in a row. According to a December 30 statement, the rates on the various instruments have been hiked by 20 to 110 basis points, and now range from 4.0 percent to 7.6 percent.

SMALL SAVINGS INSTRUMENT INTEREST RATE FOR OCT-DEC INTEREST RATE FOR JAN-MAR

Savings deposit                                     4.0%                                         4.0%

One-year time deposit                             5.5%                                         6.6%

Two-year time deposit                             5.7%                                         6.8%

Three-year time deposit                             5.8%                                         6.9%

Five-year time deposit                              6.7%                                          7.0%

Five-year recurring deposit                       5.8%                                          5.8%

Senior Citizen Savings Scheme               7.6%                                            8.0%

Monthly Income Account                               6.7%                                             7.1%

National Savings Certificate                        6.8%                                              7.0%

Public Provident Fund Scheme                 7.1%                                              7.1%

Kisan Vikas Patra                                         7.0% (123 months)               7.2% (120 months)

Sukanya Samriddhi Account Scheme         7.6%                                         7.6%

While the government sets the modest savings interest rates, they are linked to market yields on government securities at a spread of 0-100 basis points over the return on equivalent maturities. However, interest rates on small savings have not consistently mirrored market rate movements.

After maintaining interest rates on these popular products steady for nine consecutive quarters, the Centre raised them by 10-30 basis points from October to December. Despite the fact that government bond yields fell by 15-25 basis points throughout the reference period.

Interest rates in the economy have risen dramatically in response to the central bank's rate rises, which have lifted its benchmark policy rate by 225 basis points since April in an effort to curb inflation. Banks have also increased their lending and deposit rates for their customers.

The Reserve Bank of India (RBI) observed in its most recent Monetary Policy Report, released on September 30, that with government bond yields rising, the revised small savings rates were 44-77 basis points lower than the formula implied rates.

The yield on five-year government bonds grew by roughly 15 basis points in September-November, which is the reference period for small savings interest rates in January-March, while 10-year bond yields jumped by 10 basis points over the same period.

The central bank has repeatedly urged the government to adhere to the formula-based approach to determining modest savings interest rates.

The RBI stated in its October 2021 Monetary Policy Report that the interest gap between small savings schemes and bank deposits had resulted in growth in accretions under the former continuously exceeding that of bank deposits since 2018. This, according to the RBI, would have ramifications for monetary transmission anytime loan demand increased.