RBI pleads to reduce rates of small savings scheme

Last week, rumours were rife about a possible rate cut in SSY, PPF, NSC and other small savings schemes. The government had decided that the rates would remain unchanged for the third quarter of FY 2019-2020. 

The Ministry of Finance released a notification dated September 30, 2019. It stated that small saving schemes would keep fetching the same rate of interest between the quarter of October and December in FY 2019-2020, same as the ones in the quarter of July to September this year. 

The Ministry of Finance has introduced a small deduction of 10 basis points in the interest rates that are linked to the market rates. 

This came as a surprise as most interest rates in the country are being slashed. This, the RBI claims, will ultimately lead to better transmission of the central bank’s rate cuts. Since banks cannot afford to have fewer deposits, the RBI believes that a decline in the rates of the small saving schemes that weren’t revised during the government’s last review will force banks to cut rates on deposits.

Also Read: RBI Expected to Roll out Another Rate Cut This Week

Banks have put forth the argument that since significant deductions in small savings rates are not being made, depositors will transfer funds from instruments like fixed deposits to schemes that offer higher returns.  

Since a lot of these instruments yield high returns, depositors will steer towards them, making the banks face a lot of deposits.

For any clarifications/feedback on the topic, please contact the writer at shilpi.guha@cleartax.in

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