Small savings rates are linked to Government Securities' (G-Secs) and readjusted every year and now they will be adjusted on the quarterly basis, said the Economic Affairs Secretary Shaktikanta Das.
The government will revise interest rates for small savings schemes in a day or two so as to align them with market rates, but keep them unchanged for the girl child and senior citizens, Economic Affairs Secretary Shaktikanta Das said on Thursday.
"The decisions have been taken and executive order and notification would be issued in a day or two. Broadly the underlying philosophy of small savings rate changes is to make the rate more frequently market aligned, make it as closely market aligned as possible," he said.
Small savings rates are linked to Government Securities' (G-Secs) and readjusted every year, he said, adding that now they will be adjusted on the quarterly basis. The new rates would be applicable from April 1, 2016, he added.
"The first effect of these changes will take place from April 1. They will be reset from April 1," he said.
Small savings schemes include Post Office Monthly Income Scheme (MIS), Public Provident Fund (PPF), Post Office Fixed Deposit Scheme, Senior Citizens Savings Scheme, Post Office Savings Account and Sukanya Samriddhi Accounts.
"At the same time, taking into consideration the interest of small savers and some important social sector measures of the government, the rates under the girl child scheme, the senior citizen scheme...they will continue as it is. They will have quarterly adjustments but whatever spreads they have over the G-Sec rates will not be altered," he said.
Similarly, all long-term savings over five years will continue to have the spread, he said, adding that at the shorter end of the curve the effort has been such that the reduction in rates is passed on and given effect to the system. "That is whatever policy rates are being announced by the Reserve Bank of India(RBI), the small savings rate will also pass it on. But at the long end of the curve, the spread will be protected. The government has taken into consideration the interest of small savers and the need to also encourage long term savers," Das said.
Asked if the banks would pass on the benefit of the rate cut to customers, Das said RBI has cut the policy rate by about 125 basis points since January last year while banks have passed on only 70 basis points. "Banks are free to decide on the interest rate. It is for banks to decide by what basis points they will cut interest," he said.
The Finance Ministry in September last year had announced its intention to review interest rates on small savings after bankers said high rates on such schemes run by the government make it difficult for banks to cut fixed deposit rates.
Even RBI Governor Raghuram Rajan had said the rate reduction on small savings like PPF and Post Office deposit is also going to bring down the cost of fund for banks.
"The government is considering small saving rates and tying them more to market interest rates. I think these actions will help (effective monetary policy) transmission," Rajan had said.
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