‘Centre’s borrowing cost to rise marginally on small savings rate increase’

The Centre’s decision to increase interest rates by 10 to 70 basis points on most small savings schemes for this quarter, will raise the government’s interest costs on borrowings from these instruments to 6.75% from 6.47%, according to an assessment by Bank of Baroda economists. 

The government plans to tap small savings schemes for financing its debt beyond the record gross market borrowings of ₹15.43 lakh crore proposed in 2023-24. 

Despite the increased rates on small savings, the interest costs on those borrowings will be significantly lower than the average cost range of 7.29%-7.35% estimated by the bank’s economists for the ₹8.88 lakh crore market borrowings the Centre plans to undertake in the first half of the year. 

“For 2023-24, the Government has budgeted ₹6.48 lakh crore as receipts from small savings,” Bank of Baroda economist Jahnavi Abhyankar wrote in a research note. “After deducting repayments, the net securities against small savings have been earmarked at ₹4.74 lakh crore,” she added.

“By calculating the component-wise borrowing costs and using the revised interest rates; it has been estimated the overall interest payment for government with the revision has inched up to 6.75% from 6.47% (based on old rates),” Ms. Abhyankar said, adding that this would entail a marginal uptick in the interest cost, from ₹41,917 crore based on the old rates, to ₹43,731 crore. 

While the Public Provident Fund (PPF) rate has been left unchanged at 7.1%, the Finance Ministry has raised rates for most other small savings schemes including time deposits with post offices, National Savings Certificate, Kisan Vikas Patra and the Sukanya Samriddhi Account (SSA) for this quarter. 

The SSA will now yield 8% to investors, but the highest return is being offered on Senior Citizens’ Savings Schemes at 8.2%. The returns on the PPF and the SSA are tax-free. 

As per Reserve Bank of India data on small savings from last year analysed by Ms. Abhyankar, the PPF accounts for almost 8% of investments in small savings schemes, savings certificates account for another 23% and deposits amount to 69%. 

Starting Saturday, a new small savings instrument, the Mahila Samman Savings Certificate, 2023, has been introduced for women investors and is available at 1.59 lakh post offices. The scheme, valid for two years, offers a 7.5% return for investments up to ₹2 lakh, and provides a partial withdrawal option. 

Separately, the government has doubled the investment limit into the Senior Citizens’ Savings Scheme to ₹30 lakh from ₹15 lakh, and that on the Monthly Income Account Scheme to ₹9 lakh, from ₹4.5 lakh.