NEW DELHI: The Reserve Bank of India (RBI) has asked the Ministry of Finance to align its interest rates on small saving schemes with market rates so that depositing money in banks remain attractive.
“The RBI has communicated the views of banks and its internal committee on the high-interest rate on the small saving scheme, which is making debt instruments more attractive for the retail investors. This was also conveyed in the meeting with the representative with the financial market, however, the final decision will be on the government,” said a senior official, finance ministry.
Based on the recommendations of the Shyamala Gopinath panel, interest rates on 12 small savings schemes are reviewed before the end of every quarter. In the October quarter, the government has decided not to change interest rates on small saving schemes such as National Saving Schemes (NSS), Public Provident Fund (PPF) and Kisan Vikas Patra (KVP). Currently, PPF continues to earn 7.90 per cent from October to December 2019.
Senior Citizens Savings Scheme (SCSS) earns 8.60 per cent. Post office time deposits continue to earn in the range of 6.90 and 7.70 per cent. Most of the schemes are eligible for tax benefits under section 80-C of the Income Tax Act. That was the reason in the last two-three years that small saving schemes are giving better returns than fixed deposits of banks. At present, banks largely offer three to four per cent interest on deposits in savings accounts.
For example, a five-year term deposit with State Bank of India will fetch 6.25 per cent interest, while a five-year NSC gives 7.9 per cent interest. This is making people invest in debt instrument than putting money in bank, causing many bankers to raise this on various platforms. Many bankers including Uday Kotak of Kotak Mahindra Bank and Rajnish Kumar, chairman, State Bank of India have flagged these concerns to the government.
The Monetary Policy Committee resolution in December said there was a need for greater flexibility in the adjustment in interest rates on small savings schemes. At the post-policy conference on December 5, the RBI governor had said that the central bank has internally conveyed its views on small savings to the government.
PPF continues to earn 7.90 per cent in Oct- Dec 2019
Senior Citizens Savings Scheme earns 8.60 per cent, while PPF continues to earn 7.90 per cent during October-December 2019. Post office time deposits earn in the range of 6.90 and 7.7 per cent. Most of the schemes are eligible for tax benefits under section 80-C of I-T Act.