Interest rates slashed!!!!

The government on Friday, March 18, 2016, reduced interest rates on small savings schemes across the board, viz., Public Provident Fund, Senior Citizen Savings Scheme, MIP, NSC, KVP.  The rates on small savings schemes have been reduced to align them to market rates.

The government has now decided on revising interest rates on small saving schemes every quarter, the new rates, therefore, will be applicable from April 1 to June 30.

Terming the decision slashing of interest rates as a “normal exercise of resetting” rates in March every year, Economic Affairs Secretary Shaktikanta Das said, according to a report.  “This will enable banks to consequently reduce their deposit rates and extend loan and credit to public and borrowers at lower rates.”

In its February 16 statement, the finance ministry had said: “The Sukanya Samriddhi Yojana, the Senior Citizen Savings Scheme and the Monthly Income Scheme are savings schemes based on laudable social development or social security goals. Hence, the interest rate and spread that these schemes enjoy over the G-sec rate of comparable maturity viz., of 75 bps, 100 bps and 25 bps respectively have been left untouched by the Government.”  On Friday, however, the rates on these 3 schemes were reduced by 60-70 basis points along with all other small saving schemes.

RBI has cut the repo rate by 125 basis points since January 2015, but the banks reduced their lending rate by only about 70 basis points.  Bank’s arguments were that if they lowered their rates further, they would lose deposits to small saving schemes.  This move by the government is seen to facilitate banks to further lower their deposit rates and subsequently the lending rates to help kick start economic activity.

The RBI is slated to review its monetary policy on April 4 and financial market expects another 25-50 BP rate cut from the RBI in the calendar year 2016.