Small savings rates need to be reduced in 9-118 bps range: RBI

The Reserve Bank of India (RBI) has sought a further reduction in interest rates on small saving instruments (SSIs) for the first quarter of fiscal 2022-23 at a time when some banks have jacked up deposit rates. “The existing rates of interest on SSIs need to be reduced in the range of 9-118 bps for Q1 of 2022-23 to align them with the formula-based rates,” it said in its ‘State of the economy’ report.

The government is expected to review interest rates on SSIs for the first quarter of 2022-23 on March 31, 2022, it added.

Interest rates on SSIs are administered by the government. They include Public Provident Fund (PPF), Sukanya Samriddhi Account (SSA), Senior Citizen Savings Scheme (SCSS), National Savings Certificate (NSC) and Post Office deposits. PPF now earns 7.10 per cent, SCSS 7.40 per cent and Post Office time deposits 5.5-6.7 per cent. These interest rates will be valid for the period between January 1, 2021, to March 31, 2022.

These administered interest rates are linked to market yields on government securities (G-secs) with a lag and are fixed on a quarterly interval at a spread ranging from 0-100 basis points (bps) over and above G-sec yields of comparable maturities, the report said.

According to RBI data, total SSI outstanding as of February 2021 was Rs 12.24 lakh crore. Of this, PPF accounts for Rs 95,170 crore, Post Office deposits and NSS Rs 8,47,119 crore, and savings certificates like NSC Rs 2,82,482 crore.

Although interest rates on SSIs have been going down in line with the trend in the financial system, these instruments still offer higher rates than bank deposits. In fact, interest rates went down by about 40 bps to more than a percentage point between January and November 2021. Further, interest rates on long-term investments such as PPF have fallen by as much as 1.5 per cent in the last five years. The only minus factor is the lack of liquidity in these schemes.

State Bank of India now offers 5 per cent interest on term deposits for 1-2 years, 5.30 per cent on 3-5 years tenure and 4.40 per cent on 180-210 days category.

The Employees’ Provident Fund Organisation (EPFO) recently cut the interest rates on EPF from 8.5 per cent to 8.1 per cent, the lowest rate in four decades.

Meanwhile, as per the RBI, with credit offtake picking up, some banks have raised interest rates on term deposits. The extent of pass-through of policy rate reduction to the median term deposit rate (MTDR), which remained 154 bps during March 2020-September 2021, dipped marginally to 150 bps in February 2022. The perceptible decline of 174 bps is discernible in the case of short tenor deposits of maturity of up to one year, the RBI said.

Across domestic banks, robust deposit growth has enabled higher pass-through by private banks to term deposit rates compared to public sector ones.

Since March 2020, the one-year median marginal cost of funds-based lending rate (MCLR) of banks softened cumulatively by 95 bps. In response to the repo rate cut of 115 bps, the weighted average lending rates (WALRs) on fresh and outstanding rupee loans declined by 140 bps and 122 bps, respectively, during the period March 2020 to January 2022, the Reserve Bank report said.

The growth in banks credit to the commercial sector, which crossed the 7.0 per cent level in November 2021 for the first time since April 2020, rose to 7.9 per cent on February 25, 2022 (6.6 per cent a year ago), it added.

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