The government sharply cut interest rates on small savings scheme by up to 1.4 percentage points for April-June after India's Monetary Policy Committee lowered the repo rate to its lowest since 2004.
Interest rates on one, two and three-year time deposits have been reduced to 5.5 percent each from 6.9 percent in January-March, according to a government notification. Interest on savings deposit has been retained at 4 percent, while it was reduced by 80 basis points to 7.1 percent on public provident fund.
Interest rates on senior citizen savings scheme has been cut by 120 basis points to 7.4 percent, while it's been reduced by 110 basis points to 6.9 percent for National Savings Certificate.
The government fixes rates on small savings schemes every quarter based on yields on government bonds. The reduction comes after the Reserve Bank of India cut interest rates by 75 basis points, taking the repo rate to 4.4 percent.
This will reduce the divergence between bank and small savings rates, said Devendra Pant, chief economist at India Ratings. But interest rates on small savings schemes are still higher and give comparatively better returns to depositors, he said.
Lower small saving rates also reduce the cost of deficit financing for the central government as majority of National Small Savings Fund corpus is used to finance the gap, Pant told BloombergQuint.
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