Government Cuts Interest Rates on NSC, PPF
- 01 Apr 2020
- 3 min read
Why in News
Recently, the Government of India slashed interest rates on small savings schemes, including National Savings Certificate and Public Provident Fund to counter the economic fallout of the coronavirus pandemic.
- The move by the government has followed the Reserve Bank of India's (RBI) recent 75 bps cut in its key interest rate.
- Interest rates for small savings schemes are notified on a quarterly basis.
- In the case of the National Savings Certificate, the government has brought down interest rates by 110 basis points (bps) to 6.8%.
- Interest rates on Public Provident Funds (PPF) for the quarter have been brought down by 80 bps to 7.1%.
- Interest rates for Kisan Vikas Patra have slashed by 70 bps to 6.9%.
Decoding the Rate Cuts
- The rate cut is in the line with RBI’s recent move to slash key interest rates.
- Government’s decision is the part of the Fiscal Policy which is a sister strategy to monetary policy (decided by the Central Bank) used in different combinations to achieve the country's economic goal.
- Small savings schemes are attractive because of higher interest rates and tax benefits, and that hurts the mobilisation of bank deposits.
- It also affects the transmission of policy rate cuts, which is why the RBI also advocated rate rationalisation on small saving.
- The move will lead the nation into a low-interest rate regime.
Small Saving Scheme
- The small savings scheme basket comprises 12 instruments.
- It includes - National Saving Certificate (NSC), Public Provident Fund (PPF), Kisan Vikas Patra (KVP) and Sukanya Samriddhi Scheme.
- It also includes Saving Deposit, Monthly Income Deposit, several time and recurring deposits.
- The rates for small saving schemes are announced quarterly.
- Theoretically the rate changes is based on yields of government securities of corresponding maturity. However, political factors also influence the rate change.
- The Shyamala Gopinath panel constituted on the Small Saving Scheme had suggested a market-linked interest rate system for small savings schemes.