Economy

Interest rate re-setting on small savings to get improvised mechanism; new rates from Q1

Shishir Sinha New Delhi | Updated on February 02, 2020 Published on February 02, 2020

Atanu Chakraborty, Economic Affairs Secretary   -  Kamal Narang

The new rates will come into effect in April quarter

Those putting money into small savings schemes are getting ready for a new interest setting arrangement from the quarter beginning April 1. The government also hopes that the new operational tax regime will not dent collection from savings.

The small savings scheme basket comprises 12 instruments including National Saving Certificate (NSC), Public Provident Fund (PPF), Kisan Vikas Patra (KVP) and Sukanya Samridihi Scheme. The government resets the interest rate in the beginning of every quarter.

Theoretically, since 2016, interest rate re-setting has been done on the basis of yields of government securities of corresponding maturity with some spread on the scheme for senior citizens, as advised by the Shyamala Gopinath Committee. However, in practice, the interest rate changes are being made taking several other factors into consideration, including political ones.

Economic Affairs Secretary Atanu Chakraborty, however, is of the view that the rates of small savings do have some linkage to the market rate, which is largely determined by the G-Sec rate .

“The operation of that linkage is yet to be done fully, as work is pending for many quarters. There are ifs and buts...If you want to signal (linkage), do it strongly,” he said, adding that linking to the G-Sec is an accepted government policy.

Banks’ concern

Chakraborty said such a move will also address the concerns of commercial banks. Banks say that 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 savings.

He expressed hope that the new tranche of ETF will be launched by the first half of FY21. “The first debt ETF took two years to be brought in. So, we can say that it will take another six months to bring in the second one,” he said. Unlike the first tranche, the second will mainly comprise government securities. However, there will not be any discount for retail investors.

The Economic Affairs Secretary made it clear that the proposal of borrowing abroad has not been junked. However, right now, the focus will be on increasing non-resident participation in the bond market here. Keeping this in mind, the Budget has proposed that certain specified categories of government securities would be opened fully for non resident investors, apart from domestic investors.

Borrowing from the global market was proposed in the July Budget. But due to strong opposition, both inside and outside the government, the proposal is yet to be implemented.

Published on February 02, 2020
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