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Small saving schemes to earn lower interest rates from April 1

What this means is that those who have deposited their money in schemes like Public Provident Fund (PPF), Post Office Monthly Income Scheme, Post Office Fixed Deposit Scheme and Post Office Savings Account could end up getting lower returns.

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It's a proposed move that could disappoint millions of small savers, who have invested in government saving schemes of less than five-year tenure.

On Thursday, Shaktikanta Das, economic affairs secretary in the finance ministry, said a notification would soon be issued announcing the linking of small saving interest rates to government securities (G-Secs) rates and revision of rates every quarter instead of every year.

What this means is that those who have deposited their money in schemes like Public Provident Fund (PPF), Post Office Monthly Income Scheme, Post Office Fixed Deposit Scheme and Post Office Savings Account could end up getting lower returns.

At present, rates for small saving schemes are fixed by the government and is above the G-Sec rates, which are determined by the money market and credibility of a state.

This way, the government is a making a loss as it gives assured rates to small savers. Once these schemes are linked to G-Sec rates, it will stop making losses.

The government has taken the decision due to intense pressure from banks. Today, small savings schemes earn higher interest rates compared to bank rates and thus are more attractive. This has been adversely affecting deposit collection of banks. The difference between the interest rates on small savings schemes and banks is between 1-2%, which makes it difficult for the banks to transmit the policy rate cut by Reserve Bank of India (RBI) due to stiff competition from government saving schemes. Over the last one year, the RBI has cut the repo rate by 125 bps while the banks have transmitted only 70 bps.

Tying the small savings rates to market rates is estimated to save the government roughly Rs4,500 crore per year.

Schemes of less than five-year tenure generally have a spread of around 25-50 basis points (bps) over the yields of G-Secs. This is likely to go once the government links it to market rates.

Das said social sector schemes relating to girl child and senior citizens like the Sukanya Samriddhi and Senior Citizens Savings Scheme will not be touched by this change.

The government will notify its decision "in a day or two" and the new rates will be applicable from April 1.

"The decision has been taken... The first effect of these changes will take place from April 1," he said.

The finance ministry has left the spread of long-term savings of more than five years untouched. "We have to take into consideration the interest of small savers. We also need to encourage long-term savings," Das said.

The move could see interest rates on small savings schemes, which have a spread of around 25-50 basis points (bps) over the G-Sec yields, lowered to the current market rate. They will also become prone to fluctuation every quarter.

The cumulative corpus of National Small Savings Fund is reportedly projected to rise to Rs 9.59 lakh crore, after accretion of Rs 52,000 crore in 2015-16.

Khushroo B Panthaky, partner at Grant Thornton India LLP, said linking the small saving schemes rates to G-Secs would make it more stable.

"They (savers) will earn the interest rates based on market dynamics and related to the market in terms of performance of the G-Secs. It is much more stable and could work in their (saver's) favour," he said.

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