Govt likely to lower small savings interest rate

New Delhi: Government is likely to lower interest rates on small savings like PPF and post office deposits to bring them in line with market rates.

Interest rate on small savings scheme is likely to come down, sources said.

The decision with regard to quantum of rate cut and time will be decided in the review to be undertaken by the Finance Ministry, sources said.

Earlier in the day, Economic Affairs Secretary Shaktikanta Das said: "It has been decided that with regard to transmission of rates, the government will undertake review of the small savings rates also."

"Small savings schemes will be reviewed. Interest of small savers will be kept in mind," he said after the Reserve Bank slashed the benchmark rate by 0.5 per cent.

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 per cent, 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.

State Bank of India was quick to get off the block by cutting its base rate by 0.4 per cent in response to today's RBI's policy decision.

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.