The government has cut small savings rate by 40-130 basis points and has linked it to Indian government bond rates and will be reviewed every quarter. Before this change, small saving rates were reset annually for the coming financial year. Now they will be reset on a quarterly basis and will vary in accordance with Indian Government bond yields.
Banks have argued in the past that high interest rates on small-saving schemes has stopped them from cutting deposit and lending rates. With this rate cut, banks will be expected to cut both deposit and lending rate.
This would further enable Reserve Bank of India, to cut the Repo rate, bringing down the rate structure in the economy. This opens us up to question about their impact on retail consumers and investors.
Small savings schemes are not as popular a financial instrument as they used to be in 1990s. Bank deposits have become much more important. Small savings used to be nearly 24 per cent of the overall bank deposits and their proportion has come down to just nearly 8 per cent of Bank deposits. This decline has accelerated since 2007. It is surprising given that there was nearly 150 bps spread between the small savings rate and deposit rates of banks.
