The government has reversed its sharp cuts in small savings instrument returns for this year, just hours after announcing them. Since moving to a quarterly interest rate setting mechanism in April 2016, the Centre has scrapped the notified interest rates on small savings schemes for the first time.
Thanks to a heavy backlash on social media about the middle class being squeezed, the government seems to have had a change of heart. Retail inflation has surpassed 6%, and the government has agreed to tax employees’ PF contributions beginning this year. “Interest rates on the Government of India’s small savings schemes will remain at the levels that prevailed in the fourth quarter of 2020-2021, i.e., rates that prevailed as of March 2021. Finance Minister Nirmala Sitharaman said in a tweet early Thursday morning that orders given by oversight will be withdrawn.
The government resets the interest rate on small savings instruments every quarter, but after three quarters of the rates remaining unchanged, this round of rate cuts was notable. Small savings rates were cut between 0.5 percent and 1.4 percent in the April to June quarter of 2020, which was the most recent round of rate cuts.
The most drastic reduction was proposed in the quarterly interest rate charged on one-year term deposits, which was reduced from 5.5 percent to 4.4 percent in the January-March quarter. The Senior Citizen Savings Scheme’s rate of return has been reduced from 7.4 percent to 6.5 percent, while the Sukanya Samriddhi Account Scheme’s rate of return has been reduced from 7.6 percent to 6.9 percent.
The interest rates on National Savings Certificates and Kisan Vikas Patras have also been reduced slightly, from 6.8% to 5.9% and 6.9% to 6.2 percent, respectively. As a result, the Kisan Vikas Patra, which previously took 124 months to mature, now takes 138 months.
It’s unclear if keeping rates at the same level would jeopardise the government’s ability to complete its borrowing plans for the year at lower interest rates, and whether the same level of rate cuts will be implemented in the June-September quarter.