Budget 2020

Small savings: What triggered the rate reversal


The government on Thursday reversed interest rate cuts across a host of small savings schemes announced a day earlier. Small savings scheme rates are reset quarterly, and have been falling over the past few years. A look at the small savings and trend rates.

1. Small savings collections have been rising over the years

2.
In 2016, their interest rates were benchmarked to market rates…

  • High interest rates were seen to be distorting the interest-rate structure
  • Faced with competition from small savings, banks could not cut deposit rates
  • High deposit rates meant lending rates could not be lowered
  • Market rates on these savings have addressed the issue.

3. So the rates had been falling over the past few years

Over the years Interest rates have dropped (except in Oct-Dec FY19)

Smallsavingsgraph2

4. Bengal tops in small 4savings collection

Smallsavingsgraph3

5. The decision on reversing rate cut may have been political, but economists are also 5 divided on the matter

IN FAVOUR OF RATE CUT

  • It is an important reform that did away with administered rates
  • Lower rates will help reduce borrowing costs
  • Cheaper loans will support the economy

CASE FOR REVERSAL

Savers also need to be incentivised; too much emphasis on borrowers
Pandemic economy dependent on large government borrowing
Savers have to provide those funds

Smallsavingsgraph4
  • Beginning April 1, 2016 rates on small savings linked to market rate
  • Rate on each small savings instrument linked to G-Secs of comparable maturity period
  • Final rate is a 25-100 basis point markup over the appropriate G-Sec rate
  • The highest 100 basis point markup is on Senior Citizen Savings Scheme
  • Rates are reset at the beginning of every quarter
  • Over the past year, G-Sec rates have steadily fallen in line with low inflation and reduction in policy rates
Small savings focusET Bureau



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