Govt's move to reset interest rates a positive step: India Ratings and Research

India Ratings and Research (Ind-Ra) on Thursday said the government's move to reset interest on small savings schemes (SSS) quarterly based on the G-Sec yields is a move in the right direction, and interest rates on such schemes will fall further in 2016-17.

"Interest rate on SSS in the second quarter of 2016-17 is likely to be 20-25 bps lower than that in first quarter of 2016-17 due to the decline in benchmark government securities rate in response to monetary easing," the rating agency said in a statement.

Ind-Ra further said this new move will reduce the income expense gap of the National Small Savings Fund (NSSF), which has been rising over the years, besides aligning the return on SSS to market rate.

Small savings directly compete with fixed deposit schemes offered by banks because of high interest rates offered on the former. Last month, the government had slashed interest rates on all small savings schemes, including PPF, Kisan Vikas Patra (KVP) and senior citizen deposits, to make them more market aligned.

Interest rate on Public Provident Fund (PPF) scheme has been cut to 8.1% for the period April 1 to June 30, from 8.7% at present. Similarly, the interest rate on KVP will be reduced to 7.8% from 8.7% while senior citizen savings scheme of five years would earn 8.6% interest compared with 9.3%. The girl-child saving scheme, Sukanya Samriddhi Account, will see interest rate of 8.6% as against 9.2%, according to a Finance Ministry order.