Government withdraws rate cut order on small savings schemes

After hours of notifying significant reductions in the returns of small savings instruments for this quarter, the government has backtracked on these sharp cuts. This is the first time that the Center has cut notified interest rates on small savings schemes after switching to the quarterly interest rate setting system in April 2016.

The government feels that the middle class is being sabotaged due to a sharp reaction on social media. Retail inflation has come down by 6% and the government has also decided to tax employee PF savings starting this year.

Finance Minister Nirmala Sitharaman said in a tweet on Thursday morning.

The government fixes the interest rate on small savings instruments every quarter, but this round of rate cuts was significant after the release of three-fourth rates. The last round of rate cuts was in the quarter from April to 2020, when small savings rates were cut from 0.5% to 1.4%.

On Wednesday night, the notified rates for the April to June 2021 quarter were lower by 40 basis points (0.4%) to 110 basis points (1.1%) on various devices.

The fastest reduction was proposed in the quarterly interest rate on one-year fixed deposits at 4.4% in the quarter from January to March. The rate of return on Senior Citizen Savings Scheme was cut from 7.4% to 6.5%, while the return of Sukanya Samriddhi Account Scheme was reduced from 7.6% to 6.9%.

The rate of return on the popular Public Provident Fund (PPF) scheme fell to 7.1% from 7.9% last April and fell to 6.1% for the quarter, before the minister announced the rollback on Thursday morning.

The rate of interest on National Savings Certificate and Kisan Vikas Patra has also come down significantly from 6.8% to 5.9% and 6.9% to 6.2% respectively. Consequently, the Kisan Vikas Patra, which matured in 124 months, was to mature in 138 months.

It remains to be seen whether keeping the rates at the same level will hurt the government’s expectations of executing its lending plans for the year at lower interest rates and if the same range of rate cuts will now be affected in the June to September quarter.