The government has announced a steep cut in interest rates on small savings schemes such as Public Provident Fund (PPF), National Savings Certificate (NSC) and Kisan Vikas Patras.
In case of PPF, the most popular scheme for middle-class savers, the reduction of 60 basis points is among the sharpest in nearly 15 years.
Interest rate on Public Provident Fund (PPF) scheme will be cut to 8.1 per cent for the period April 1 to June 30, from 8.7 per cent, at present. Rate on Kisan Vikas Patra is being lowered to 7.8 per cent from 8.7 per cent.
Although the rates are to be reviewed every three months, but assuming they remain unchanged during the next financial year, then someone with Rs 5 lakh in his PPF account would face a hit of Rs 3,000 in 2016-17.
This lowering of savings interest is not going to well with the middle class and especially the senior citizen community. In response to the severe criticism, the Ministry of Economic Affairs replied:
“Terming the decision slashing of interest rates as a “normal exercise of resetting” rates in March every year and this will enable banks to consequently reduce their deposit rates and extend loan and credit to public and borrowers at lower rates.”
According to the statement released by RBI in Dec last year:
The rate of interest on small savings are currently much higher than those offered by banks, causing a distortion in the interest rate structure that is coming in the way of interest rates declining. “The government is examining linking small savings interest rates to market interest rates. These moves should further help transmission of policy rates into lending rates.”
Therefore, it is projected as a sought after move to reduce the rates on savings scheme to generate more funding for economic growth. However, it might distort the overall savings for the families and will effect the consumption and growth levels.