Small savings rates 44-77 bps lower than formula: RBI Bulletin

The current returns on India’s small savings schemes have slipped below the formula prescribed for determining their rates by 44 to 77 basis points (bps), despite a 10 to 30 bps increase effected by the government on some schemes’ returns for the October-to-December quarter. (100 basis points equal one percentage point).

Effecting the first increase in small savings rates since January 2019, the government raised returns on five of 12 such schemes in operation for this quarter. This was the first tweak in small savings since the April-to-June quarter of 2020 when they were slashed across schemes.

Returns on these schemes are linked to market yields on government securities (G-secs) with a lag and are fixed on a quarterly basis at a spread of 0 to 100 basis points (bps) over and above G-sec yields of comparable maturities.

“With G-sec yields moving higher, the prevailing interest rates on various schemes are 44-77 bps below the formula implied rates for Q3: 2022-23,” the RBI Bulletin released on Monday noted.

The formula-based return on the popular Public Provident Fund (PPF) for which the government did not raise rates this quarter, the RBI reckoned, was 7.72% instead of the 7.1% currently accruing to such savings. Returns are below the formulaic rate by 55 to 77 bps, for as many as nine of the dozen schemes.

The gap between the current return and formula-based rates is widest for three-year term deposits, whose payout rate was incidentally raised the most in this quarter (by 30 bps to 5.8%), and recurring deposit accounts, whose returns were not altered for this quarter – at 77 bps.

The senior citizens’ savings scheme, whose returns were raised from 7.4% to 7.6% for this quarter, should have been paid 8.04% as per the formula, RBI calculations showed. Similarly, the formula-based return on the Sukanya Samriddhi Account Scheme stands at 8.22%, but its returns were left unchanged at 7.6%.

There is also a wide gap of almost 70 bps between the 6.8% rate paid on National Savings Certificates and the 7.48% formula-based rate for the October-to-December quarter. The returns on Kisan Vikas Patra, at 7%, are 47 bps lower than the formula rates, the RBI estimated.