Government Reversed the Interest Rates Cut Decision on Small Saving Schemes: Calling it an Oversight

Apr 01, 2021

Small savings schemes, which include instruments such as National Saving Certificates, Public Provident Fund, Kisan Vikas Patra, Sukanya Samriddhi Yojana, and others, are one of the most important investment avenues for investors. The Government of India or Public sector financial institutions or Banks launches these schemes; however, each differs in interest rates, investment horizon and tax treatments.

The government resets the interest rate of such schemes at the beginning of every quarter; it is based on yields of government securities of the corresponding maturity. The interest rate changes are made considering several macroeconomic factors.

In the year 2020, fixed income markets experienced unprecedented changes in the wake of COVID-19 pandemic and investors witnessed a fall in interest rates across various categories of fixed income instruments.

The finance minister had previously cut interest rates a year ago on the small saving schemes for the first quarter of FY2020-21 and since then it has been steady. The rate cut was between 70 basis points and 140 basis points; it affected all small saving schemes except the savings deposit instrument.

[Read: Should the Rate Cut on Small Schemes Deter You from Investing]

On Wednesday 31st March, the last working day of FY2020-21, the ministry of finance announced with a circular the interest rate cut on small savings schemes for first quarter of FY2021-22 after keeping it unchanged for the past three quarters.


However, within 12 hours of this decision on Thursday morning, i.e. 1st April, the finance minister Ms Nirmala Sitharaman made an announcement on Twitter to withdraw the decision of interest rate cut on small saving schemes.

The finance minister mentioned, "Interest rates of small savings schemes of GoI shall continue to be at the rates which existed in the last quarter of 2020-2021, i.e., rates that prevailed as of March 2021. Orders issued by oversight shall be withdrawn"

Now, if the interest rate-cut announcement had been considered effective since April 1, 2021, the following adjustments in small-savings interest rates may have occurred:

Instruments Interest rate (%) as of March 2021 Proposed and withdrawn Interest rate (%) for April-June 2021 quarter Change in Interest rate (%) if not withdrawn
Savings Deposit 4.0 3.5 0.5
1 Year Time Deposit 5.5 4.4 1.1
2 Year Time Deposit 5.5 5.0 0.5
3 Year Time Deposit 5.5 5.1 0.4
5 Year Time Deposit 6.7 5.8 0.9
5 Year Recurring Deposit 5.8 5.3 0.5
Senior Citizen Savings Scheme 7.4 6.5 0.9
Monthly Income Account 6.6 5.7 0.9
National Savings Certificate 6.8 5.9 0.9
Public Provident Fund Scheme 7.1 6.4 0.7
Kisan Vikas Patra 6.9 (will mature in 124 months) 6.2 (will mature in 138 months) 0.7
Sukanya Samriddhi Account Scheme 7.6 6.9 0.7
(Source: Department of Economic Affairs)

Since the government revoked its decision to slash interest rates on small savings schemes, the interest rate will remain unchanged for the first quarter of FY2021-22 from April to June only.

This reversal of decision by the ministry of finance faced swift reactions, the former finance minister Mr P Chidambaram reacted on Twitter stating, "Announcement of interest rates on savings instruments for the next quarter is a regular exercise. There is nothing "inadvertent" about its release on 31st March." this was in reference to the sentence of "Orders issued by oversight shall be withdrawn."

In addition, after the declaration of a decline in interest rates, the government received an intense barrage of criticism on Twitter from a certain populace that holds dependency on small saving schemes and such rates cuts will affect their wealth.

Although the government has not provided a proper rationale behind the withdrawal of their decision, it could be the criticism received through various media channels that made the ministry of finance to pull back its announcement. Moreover, the announcement made during the ongoing elections in West Bengal and few other states for their assemblies might as well be one of the reasons.

The government on 31st March, 2021 kept the inflation target of monetary policy framework unchanged for the next five years at 2-6 per cent; it was earlier set five years ago in 2016 in consultation with Reserve Bank of India (RBI). The inflation is expected to rise in the future if there are hurdles in economic recovery and in such a scenario; reduction in the interest rates will impact the investor's wealth and lack inflation-adjusted returns.

The news of the decision being revoked brought relief to fixed income investors, especially senior citizens who rely on interest income. With falling interest rates on fixed deposits, risk-averse investors took to small savings scheme backed by the government and to generate inflation-adjusted returns as an alternate investment avenue.

Notably, this reversal of the government's decision might be an indicator that there is a future possibility of interest rate cuts to support the economy push spending and escape the liquidity crunch. Despite the rate cuts, many investors are attracted to the government savings schemes as they provide safety of capital.

However, as an investor, you must now build a strong investment portfolio that encompasses your wealth creation. Investments in government-backed schemes have limited returns because interest income is taxable. You need to have a suitable asset allocation by diversifying your investments to generate wealth in long-term for your financial well-being.

Therefore, invest in worthy investment schemes that will help you build wealth, mutual funds are known to offer better risk-adjusted returns in long run. You must align your investments with your financial goals, investment horizon and risk appetite; also risk-averse investors could opt for mutual fund schemes with less equity exposure as these hold high market risk.

Similarly, you may consider other investment avenues from various asset classes that are suitable to your investment objective.

Warm Regards,
Mitali Dhoke
Jr. Research Analyst

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