NEW DELHI: The government left small savings rates unchanged for the July-September quarter after an uproar over a sharp cut in April had forced it to reverse the decision.
This is the fifth straight quarter where rates have been left unchanged, providing respite to middle class investors who park their savings in Public Provident Fund, Senior Citizen Savings Scheme and National Savings Certificate, among other instruments.
However, the status quo will make interest rates stickier for banks, which will not be able to reduce deposit rates, fearing a flight of funds to higher-earning products such as PPF that also offer tax benefits. It will make it difficult for banks to significantly lower home loan and other lending rates.
Currently, State Bank of India offers the highest rate of 5.4% on fixed deposits with a tenure of five to 10 years. In contrast, PPF deposits will offer 7.1% and will be tax-free. So, an investor in the 30% income-tax bracket can hope to earn over 9% on these funds.
The last round of rate cuts, which came in the middle of elections in West Bengal and other states, had to be reversed within hours.
Given the weak economic sentiment and concerns over price rise, especially in the wake of petrol and diesel rates crossing the Rs 100-a-litre mark in several parts of the country, the government may not have wanted to upset the middle class further.
Besides, in the past, the money, which are government borrowings that flow into the National Small Savings Fund, also came handy in meeting off-budget funding requirements, such as paying for food subsidy or lending to Air India. In the last budget, finance minister Nirmala Sitharaman had, however, cleaned up the books by clearing dues of FCI and others directly.
