Small savings rates slashed, PPF rate cut to 8.1% from 8.7%

The government on Friday slashed interest rates on small-savings schemes, including the Public Provident Fund and Kisan Vikas Patra.

The decision is aimed at aligning these administered interest rates closer to the market rates. The new rates will come into effect on April 1 and will be valid till June 30. After the decision taken last month to revise the interest rates on small savings every quarter, the rate under the Public Provident Fund scheme will be cut to 8.1 per cent for the period from April 1 to June 30 from 8.7 per cent, said a Finance Ministry order.

While the interest rate on the KVP will be cut to 7.8 per cent from 8.7 per cent, that on post office savings is retained at 4 per cent. The rates on term deposits of durations varying from one to five years have been cut.

The five-year National Savings Certificates will earn interest at the rate of 8.1 per cent as against 8.5 per cent now. A five-year Monthly Income Account will fetch 7.8 per cent as opposed to 8.4 per cent now. The girl-child saving scheme, Sukanya Samriddhi Account, will have an interest rate of 8.6 per cent as against 9.2 per cent. The senior citizen savings scheme of five years will earn 8.6 per cent compared with 9.3 per cent.

The rates on the post office term deposits are being cut from 8.4 per cent to 7.1 per cent for one-year time deposits, 7.2 per cent for two-year time deposits and 7.4 per cent for three-year time deposits.

The rate for the five-year time deposit is being reduced to 7.9 per cent from 8.5 per cent. For five-year recurring deposits, the rate has been slashed to 7.4 per cent from 8.4 per cent.

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More room for banks to pass on rate cuts: Raghuram Rajan

RBI Governor Raghuram Rajan on Tuesday said that there is more room for rate cut by banks as the lenders on an average have only passed less than half of the 1.25 per cent reduction announced during 2015.

“I think if you look at 1-3 year deposits, banks have already cut significantly more than what has been transmitted through the base rate. In that sense, there is room building up for the banks to transmit more. I think it is a matter of time as these costs flow through,” Dr. Rajan said.

“Thus far, we have seen only half the interest rate cuts since January passed through. We are working with the banks...,” he said after unveiling fifth bi-monthly monetary policy statement, 2015-16 here.

Since the rate reduction cycle that commenced in January, less than half of the cumulative policy repo rate reduction of 125 basis points has been transmitted by banks, he said, adding, the median base lending rate has declined only by 60 basis points.

The RBI in four installments reduced interest rate by 1.25 per cent to 6.75 per cent. The first rate cut of 0.25 per cent was effected in January, followed by similar rate cut in March. The third rate cut of 0.25 per cent was done in June.

In the last policy review on September 29, the RBI had slashed interest rate by 0.5 per cent.

The benchmark repurchase (repo) rate has subsequently come down from 7.25 per cent to 6.75 per cent, the lowest in four-and-a-half years.

Banks have been saying the high small saving rates are hindering banks from reducing interest rates. If banks reduce rate unilaterally, they will become uncooperative.

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 both these actions will help transmission,” he added.

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