NEW DELHI: By holding small savings rates steady for six quarters, the government is paying between 47 and 178 basis points (100 basis points equal a percentage point) higher to those parking funds in public provident fund, National Savings Certificate or term deposits in post offices, the Reserve Bank of India (RBI) said on Monday.
Interest rates on small savings schemes are to be revised every quarter in line with an agreed formula that offers a spread over the average yield on government securities for a comparable maturity.
For instance, in the case of the hugely popular PPF, which comes with a 15-year lock in, a 25-basis point spread is allowed.
After factoring in the average yield of 6.38% on G-secs with comparable maturity, the government should be offering 6.63% during the current quarter, but is instead paying 7.1%, RBI estimated (see table).
Given that investment up to Rs 1.5 lakh annually in several schemes comes with tax benefits, the returns work out higher.
The status quo — despite a softening of deposit and lending rates — offers comfort to the middle class and those in higher income brackets, but puts pressure on banks when it comes to mopping up deposits, something that RBI has said in the past but refrained from doing so while pointing to the divergence in its monthly Bulletin, released on Monday.
It only said that between March 2020 and September 2021, deposit rates have declined by up to 180 basis points across shorter maturities (up to one year), with the weighted average domestic term deposit rate falling 135 basis points (March 2020 to August 2021).
In fact, between March 2020 and September 2021, foreign banks have deposit reduced rates by up to 195 basis points, while state-run players are offering 85-157 basis points lower, depending on the maturity.
During this period, lending rates too have dropped with the one-year median marginal cost of funds-based lending rates for scheduled commercial banks coming down by 103 basis points as the cost of funds too fell.
In March, the finance ministry had announced a sharp cut in small savings rates for the April-June quarter — by 50 to 100 basis points — but the decision was reversed within hours amid protests, which also coincided with assembly elections in states, including West Bengal, the largest contributor to the kitty. Since then, the government has chosen to play safe and left rates unchanged.