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HomeEconomyGovernment withdraws interest rate cut order on PPF, other small saving schemes

Government withdraws interest rate cut order on PPF, other small saving schemes

The government appears to have had a rethink owing to a sharp backlash on social media about the middle class being squeezed

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Finance Minister Nirmala Sitharaman withdrew the government decision of reducing the interest rates on small savings on 1 April. 

Earlier, on 31 March, the government had given a big blow to the ordinary citizens who bank on the provident fund as an insurance for their and emergency situations by cutting interest rates on small savings. However, taking to Twitter the following day, Nirmala Sitharaman wrote, “Interest rates of small savings schemes of GoI shall continue to be at the rates which existed in the last quarter of 2020-2021, ie, rates that prevailed as of March 2021. Orders issued by oversight shall be withdrawn. @FinMinIndia @PIB_India”

The Finance Ministry in a circular on 31 March announced that the on small savings deposits has been reduced to 3.5% from 4% for the first quarter of 2021-22. If this was indeed an oversight, the Modi government has faced innumerable instances of bureaucratic misgovernance since 2014, which even involved one ministry of the government filing affidavits against another in courts.

The government resets the on small savings instruments every quarter, but this round of rate cuts was significant after three quarters of the rates being left untouched. The last round of rate reductions was in the April to June quarter of 2020, when small savings rates had been cut between 0.5% and 1.4%.

The rates notified on 31 March night for the April to June 2021 quarter were 40 basis points (0.4%) to 110 basis points (1.1%) lower on various instruments.

The sharpest cut was proposed in the quarterly paid on one year term deposits, from 5.5% in the January to March quarter to 4.4% in this quarter. The rate of return on the Senior Citizen Savings’ Scheme was cut from 7.4% to 6.5%, while the Sukanya Samriddhi Account Scheme’s return was reduced from 7.6% to 6.9%.

The rate of return on the popular Public Provident Fund (PPF) scheme was reduced from 7.9% to 7.1% last April and further slashed to 6.1% for this quarter, before the minister announced the rollback on 1 April morning.

The paid on National Savings and Kisan Vikas Patra were reduced significantly, from 6.8% to 5.9%, and from 6.9% to 6.2%, respectively. Consequently, the Kisan Vikas Patra, which used to mature in 124 months, was to mature in 138 months.

It remains to be seen if holding the rates at the same level will hurt the government’s hopes of executing its borrowing plans for the year at lower interest rates and if the same extent of rate cuts will now be effected in the June to September quarter.

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