India lowers interest rate on small savings to 5.5%

The government on Tuesday slashed interest rates on small savings schemes, including NSC and PPF, by up to 1.4 percentage points for the first quarter of 2020-21, in line with moderation in bank deposit rates.

Interest rates for small savings schemes are notified on a quarterly basis.

"The rates of interest on various small savings schemes for the first quarter of the financial year 2020-21 starting April 1, 2020, and ending on June 30, 2020, have been revised," the finance ministry said in a notification.

With the reduction, term deposits of 1-3 years will now earn an interest rate of 5.5 per cent as against 6.9 per cent, down 1.4 percentage points, the notification said.

However, the interest rate on the five-year term deposit has been reduced to 6.7 per cent from current rate of 7.7 per cent, it said adding that interest rate on these are paid quarterly.

The cut in the interest rate on a 5-year recurring deposit is 1.4 percentage points. The new rate for this saving instrument will be 5.8 per cent.

The interest rate for the five-year Senior Citizens Savings Scheme has been lowered by 1.2 percentage points to 7.4 per cent, from the existing 8.6 per cent. The interest on the senior citizens scheme is also paid quarterly.

However, interest on savings deposits has been retained at 4 per cent annually.

The girl child savings scheme Sukanya Samriddhi Yojana account will earn a lower rate of 7.6 per cent as against 8.4 per cent during the first quarter of the next financial year 2020-21.

The interest rate moderation for Public Provident Fund (PPF) and National Savings Certificate (NSC) for the next quarter is 0.8 percentage points and 1.1 percentage points, respectively, it said. The rates will now stand at 7.1 per cent for PPF and 6.8 per cent for NSC.

The Kisan Vikas Patra (KVP) will give a lower yield of 6.9 per cent with enhanced maturity period of 124 months as against 7.6 per cent and 113 months maturity at present.

While announcing the quarterly setting of interest rates in 2016, the finance ministry had said the rates of small savings schemes would be linked to government bond yields.

Last month, Economic Affairs Secretary Atanu Chakraborty had hinted at revision in small savings rates for the next quarter, in line with market rate for speedier transmission of monetary policy rate.

Stating that the Shyamala Gopinath Committee report has been accepted, but operation of the linkage was still in the works, he had said "wait for this quarter interest rates. That will give you a fairly good indication."

Bankers have been complaining that high small savings rates prohibits them to cut their deposit rates immediately to check flight of savings. DP HRS