Interest rates on small savings plans must be revised quarterly according to an agreed formula that offers a spread over the average yield on government securities for a comparable maturity.
For example, in the case of the very popular PPF, which comes with a 15-year lock-in, a spread of 25 basis points is allowed.
After factoring in the 6.38% average yield on G-sec at comparable maturity, the government is expected to offer 6.63% in the current quarter, but instead pays 7.1%, estimates RBI ( See table).
Since investing up to Rs 1.5 lakh per year in several schemes comes with tax benefits, the returns are higher.
The status quo – despite easing deposit and credit rates – offers comfort to the middle class and high income earners, but puts pressure on banks when it comes to moping deposits, which RBI has said in the past but refrained from doing so while pointing to the discrepancy in his Monthly Bulletin, released on Monday.
He only indicated that between March 2020 and September 2021, deposit rates fell by up to 180 basis points on shorter maturities (up to one year), with the weighted average rate on domestic term deposits falling by 135 basis points (March 2020 to August 2021).
In fact, between March 2020 and September 2021, foreign banks cut deposit rates by up to 195 basis points, while public players offer 85 to 157 basis points lower, depending on the deadline.
During this period, lending rates also declined, with the one-year median marginal cost of funds-based lending rates for programmed commercial banks falling by 103 basis points, with the cost of funds also falling.
In March, the finance ministry announced a sharp drop in children’s savings rates for the April to June quarter – from 50 to 100 basis points – but the decision was overturned within hours amid protests, which also coincided with legislative elections in the states, including the West. Bengal, the biggest contributor to the prize pool. The government has since chosen to play it safe and leave rates unchanged.