Finance Ministry decides to revisit small savings interest rate

New Delhi: The Finance Ministry on Tuesday said the interest rate on small savings like PPF and post office deposits will be reviewed, but interest of small savers will be taken into account while doing so.

"It has been decided that with regard to transmission of rates, the government will undertake review of the small savings rates also," Economic Affairs Secretary Shaktikanta Das said after RBI slashed the benchmark rate by 0.5 percent.

"Small savings schemes will be reviewed. Interest of small savers will be kept in mind."

There has been a call from bankers to lower interest rate on small savings as a high rate on such schemes run by the government makes fixed deposits of banks uncompetitive.

With small saving deposits commanding a rate of 8.7-9.3 percent, banks have been reluctant to transmit the entire policy rate reduction by RBI to borrowers.

They want to keep their deposit rates attractive to match those in small saving schemes, popular among masses.

"Small savings are a decision which the government has taken in response to the policy action by RBI and as the Governor has said, RBI is working closely with the finance ministry to see the rates are transmitted by banks and financial institutions," he said.

He added that all aspects of the small savings scheme will be reviewed.

The median base lending rates of banks have come down by only about 30 bps despite extremely easy liquidity conditions, which is a fraction of the 75 bps of the policy rate reduction during January-June.

SBI was quick to get off the block by cutting its base rate by 0.4 percent in response to today's RBI's policy decision. Andhra Bank too slashed its rate while others are likely to follow suit.

Smalls saving schemes include Post Office Monthly Income Scheme (MIS), Public Provident Fund (PPF), Post Office Time Deposit Scheme, Senior Citizen's Savings Scheme, Post Office Savings Account and Sukanya Samriddhi Accounts.