Government Reverses Interest Rate Cut Order On PPF & Other Small Savings Schemes

Government Reverses Interest Rate Cut Order On PPF & Other Small Savings Schemes

Highlights: 

  • The orders issued by oversight will be revoked, according to Finance Minister Nirmala Sitharaman.
  • Yesterday, in a massive blow to middle-class depositors, the government declared a massive reduction in interest rates of up to 1.1 percent for the first quarter of 2021-22.

The government has withdrawn the sharp cut in small savings rates that was set to take effect today. Nirmala Sitharaman, the Finance Minister, announced the news early morning on Twitter on April 1.

Earlier, the government cut down the interest rates on various small savings schemes by 40-110 points basis, on the last day of the financial year i.e., on 31st March, Wednesday. The new rates were supposed to take effect on April 1 and last until June 30.

Finance Minister, Nirmala Sitharaman went on Twitter and informed about the decision. Her tweet said, “Interest rates of small savings schemes of GoI (Government of India) 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 Orders issued by oversight shall be withdrawn.”

The Finance Ministry reported on Wednesday that the interest rate on savings deposits has been lowered from 4% to 3.5 percent for the first quarter of 2021-22. Time deposit rates have also been cut dramatically.

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The Public Provident Fund (PPF), one of the most common fixed income items, was expected to yield a rate of 6.4 percent, down from 7.1 percent previously. The National Savings Certificate (NSC) was expected to yield 5.9%, down from 6.8% previously, while the girl child savings scheme Sukanya Samriddhi Yojana was expected to yield 6.9%, down from 7.6% previously.

The steepest cut was 110 basis points to 4.4 percent from 5.5 percent for one-year time deposits. Rates on two-, three-, and five-year period deposits were also cut by 40-90 basis points.

The circular from the Finance Ministry came at a time when inflation was on the rise. The government’s latest retail inflation data showed the headline number rising to 5.03 percent in February from a 16-month low of 4.06 percent in January, a three-month high.

Lowering interest rates may have helped the government reduce costs but it would have harmed investors, particularly the elderly and middle class.

Small savings schemes’ interest rates are reset on a quarterly basis, in accordance with the movement of similar-maturity benchmark government bonds.

The finance ministry reduced interest rates on small savings schemes by up to 140 basis points for the April-June quarter in 2020. For the previous three years, this had been unchanged.

Small savings have emerged as a key source of funding for the government deficit, especially after the Covid-19 pandemic caused the government deficit to swell, necessitating higher borrowing needs. The government projected that small savings would boost Rs 4.8 lakh crore in the 2020-21 Revised Estimates, compared to budget estimates of Rs 2.4 lakh crore. Borrowings from small savings are expected to total Rs 3.91 lakh crore in 2021-22.

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Swastika Dubey

Swastika Dubey is a content writer who has a keen interest in politics, fashion, and lifestyle. She is a post-graduate in Economics and loves to listen to classic old Hindi songs and travel to new places in her leisure time. Her writing is well researched, covering important aspects and core of the topic covering crucial points.

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