We’ll never know whether the Finance Ministry’s rapid U-turn on the rate reset for small savings schemes was someone’s idea of an April Fool prank or a rethink triggered by, ahem, political considerations. Whatever the reason, small savers can heave a sigh of relief that they’ve won a reprieve from the 50 to 110 basis point cuts, for now. Had they gone through, retirees would have had to take a 13 per cent haircut on their interest income from the Senior Citizens Savings Scheme, others a 14 per cent dent on the Monthly Income Scheme and 1-year depositors a 20 per cent hit to their interest receipts.

Indian savers have gotten used to the inconvenience of floating rates on small savings, since these rates were deregulated in 2012 based on the Shyamala Gopinath committee report. But they do have a right to expect that small savings rates will move with market interest rates and offer a reasonable real return over inflation. Had the Centre gone ahead with its cuts, savers would have been thrown under the bus on both counts. India’s retail inflation, averaging 5.9 per cent in the last six months, is showing signs of spiralling further on food and fuel prices. Market interest rates have been moving up this past quarter, with the 5-year G-sec yield up from 5.1 to 5.7 per cent and the 10-year G-sec yield up from 5.9 to 6.2 per cent between January 1 and March 31, 2021.

Until now, the NDA regime has proved to be quite sympathetic to savers, by holding small savings rates steady as market interest rates plumbed new depths last year. But this is not the time to undo the good work. Wednesday’s comedy of errors is also a reminder that quarterly resets on small savings are best put on autopilot, with a clear peg to market yields. The Centre had committed to a 100-basis point spread over the gilt for SCSS and a 25-basis point spread for 5-year time deposits, NSC and PPF. It needs to go back to such transparent rate-setting, while ensuring a minimum floor over prevailing inflation rates.

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