Govt cuts rates on short-term post office schemes by 0.25%

New Delhi: Seeking to align interest on small savings with market rates, the government on Tuesday cut rates on short-term post office deposits by 0.25 percent but left long-term instruments such as MIS, PPF, senior citizen and girl child schemes untouched.

Post office savings of 1, 2 and 3 year term deposits, Kisan Vikas Patra (KVP) as well as 5-year Recurring Deposits till now earned 0.25 percent higher interest than the Government securities of similar tenures.

This advantage has been withdrawn with effect from April 1, 2016, a Finance Ministry statement said, adding henceforth the rates would be revised every quarter.

Sukanya Samriddhi Yojana, Senior Citizen Savings Scheme and the Monthly Income Scheme (MIS) -- which command 0.75 percent, 1 percent and 0.25 percent higher interest rate respectively than G-secs -- will remain untouched as they are linked to social security goals.

Similarly, long-term instruments such as 5-year term deposit and similar tenure National Saving Certificates as well as Public Provident Fund (PPF) have been left unchanged.

Currently, PPF deposits get 8.7 percent interest rate while girl child scheme Sukanya Samriddhi Yojana commands 9.2 percent. MIS gets 8.4 percent interest rate.

Post office savings of 1, 2 and 3 year term deposits and 5-year recurring deposit currently fetch 8.4 percent interest per annum. Kisan Vikas Patra or KVP currently provides for doubling of principal in 100 months (8 year 4 months).

"The 25 basis points spread that 1 year, 2 year and 3 year term deposits, KVPs and 5 year Recurring Deposits have over comparable tenure Government securities, shall stand removed with effect from April 1, 2016, to make them closer in interest rates to the similar instruments of the banking sector," the statement said.

The move, it said, would help the economy move to "a lower overall interest rate regime eventually and thereby help all, particularly low-income and salaried classes".

The government has also permitted pre-mature closure of PPF accounts "in genuine cases", like cases of serious ailment, higher education of children.

"This shall be permitted with a penalty of 1 per cent reduction in interest payable on the whole deposit and only for the accounts having completed five years from the date of opening," it added.

The interest rate for every quarter would be decided on the 15th of the preceding month. Giving example, the Ministry said the rate for April-June quarter would be set on March 15 and would be based on G-Sec rates that prevailed in the three months of December, January and February.

"The compounding of interest, which is biannual in the case of 10-year National Saving Certificate, 5-year National Saving Certificate and KVP, shall be done on an annual basis from April 1," the statement added.

The Finance Ministry said that small saving interest rates are perceived to limit the banking sector's ability to lower deposit rates in response to the monetary policy of the Reserve Bank of India.

"In the context of easing the transmission of the lower interest rates in the economy, the government also has to take a comprehensive view on the social goals of certain National Small Savings Schemes (NSS)," it added.

The NSS, regulated by the Finance Ministry, offer complete security of investment combined with high attractive returns.

These schemes also act as instruments of financial inclusion especially in the geographically inaccessible areas due to their implementation primarily through the Post Offices.