The Finance Ministry has decided not to make any change in interest rate on small savings schemes for the third time in a row. The new interest period is to start from January 1.

Small savings schemes include popular instruments such as National Saving Certificates (NSC) and Public Provident Fund (PPF). The schemes not only give higher interest rate than bank’s fixed deposits but some of them help in saving income tax also.

In the last couple of months, banks have lowered interest rate on all types of term deposits and on savings account. This has put pressure on the Government to cut rates on small savings, but it refused to relent this time. Banks say that small savings schemes are attractive because of the higher interest rates and tax benefits, and that its hurts mobilisation of bank deposits. It also affects the transmission of policy rate cuts, which is why the RBI has also advocated rate rationalisation on small savings.

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The small savings schemes basket comprises 12 instruments including the National Saving Certificate (NSC), Public Provident Fund (PPF), Kisan Vikas Patra (KVP) and Sukanya Samridihi Scheme. The government resets the interest rate at the beginning of every quarter. Theoretically, since 2016, interest rate resetting has been done based on yields of government securities of the 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 made considering several other factors, including political ones.

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