Govt rolls back interest rate cuts in postal, savings schemes

Govt rolls back interest rate cuts in postal, savings schemes


Govt rolls back interest rate cuts in postal, savings schemes

Finance Minister Smt Nirmala Sitharaman

Sitharaman tweets early on Thursday that the orders were issued by ‘oversight’Union finance minister Nirmala Sitharaman

The government withdrew steep cuts in small savings rates early on Thursday, with Union finance minister Nirmala Sitharaman declaring that the orders that would impact schemes ranging from the National Savings Certificates or NSC and Public Provident Fund or PPF, were issued on Wednesday by “oversight”.

“Interest rates of small savings schemes of the government of India 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 Orders issued by oversight shall be withdrawn,” Finance Minister Nirmala Sitharaman tweeted on Thursday morning, reported PTI.

The rollback came on a day the second phase of voting was on for assembly elections in Bengal and Assam.Advertisement

On Wednesday night, the government dropped the bombshell that interest rates on postal deposits and schemes had been slashed by 40 to 110 basis points.

The interest rate on the popular public provident fund (PPF) scheme was cut from 7.1 per cent to 6.4 per cent, a 46-year low. The PPF interest rate would have  tumbled below 7 per cent for the first time since 1974.

The sharpest cut was announced in the one-year time deposit where the rate went down by a whopping 110 basis points to 4.4 per cent. A hundred basis points make one percentage point.

The interest rate on the postal savings deposit was slashed to 3.5 per cent. The rate had been steady at 4 per cent since December 2011.

The move to pare rates came on top of last year’s sharper rate reduction of 70 to 140 basis points and would have left small savers with no real place to preserve a nest egg as retail inflation stubbornly stays above 5 per cent.

The rate cuts were supposedly in line with the fall in the yield on the 10-year government security to which they are linked. Curiously however, the yield on the 10-year gilt ruled at 6.17 per cent on Wednesday. Last year, when the small saving rates were cut, the yield on the 10-year bond was 6.14 per cent.

The Shyamala Gopinath committee had suggested that the interest rates on the various small savings schemes should be 25-100 basis points higher than the yield on the government bonds of similar maturity.

The government has not always followed that dictum.