“We have done our part in supporting the economy by cutting the repo rate twice. Why don’t you back us by reducing the interest rates on small savings schemes?”

This seems to be the underlying message from the Reserve Bank of India (RBI) to the government, going by what the former’s staff wrote in a recent article.

They cautioned that in a rate easing cycle, when deposit rates are expected to fall, higher small savings rates can be a potential source of concern for bank deposit growth.

This observation comes at a time when deposit growth is lagging credit growth. Non-food credit growth of scheduled commercial banks (SCBs) was at 12 per cent (year-on-year) as on March 21, while deposit growth was around 10 per cent.

With the monetary policy committee (MPC) cutting the repo rate twice by 25 basis points each, in as many meetings, and changing its stance to “accommodative” from “neutral”, the central bank’s endeavour is to ensure that the transmission of these cuts into deposit and lending rates happens smoothly.

Hence, the statement by the RBI staff could be likened to a nudge to the government to lower the rates on small savings schemes.

After reviewing the interest rates on various small savings instruments, which are linked to the secondary market yields on government securities (G-Secs) of comparable maturities, the government, late last month, decided to keep them unchanged for Q1 (April-June) FY26. As a result, the rates on most instruments are now above the formula-based rates — in the range of 16-66 basis points (bps), according to an assessment by the RBI staff. One basis point is equal to one-hundredth of a percentage point.

The government offers an additional interest rate spread of 25 bps on small savings schemes such as Public Provident Fund (PPF), five-year time deposit (TD), monthly income scheme (MIS), and National Savings Certificate. Further, it offers additional spread of 100 bps for the Senior Citizen Savings Scheme and 75 bps for Sukanya Samridhi Scheme.

No rush to park monies

Madan Sabnavis, Chief Economist, Bank of Baroda, observed that while relatively higher interest rates on small savings schemes can affect banks’ deposit growth, there is no distinct trend of huge sums going into them.

“These schemes are normally meant for people in the lower income groups and rural areas. So, we don’t see too many people going in for small savings,” he said.

Small savings schemes have a positive (additional) spread vis-à-vis government securities of similar maturities. This takes into account the interests of small savers and the absence of social security among the unorganised sections of society.

“So, theoretically, the interest rates are higher on small savings schemes and come in the way of monetary policy transmission and deposit growth. But, practically, people aren’t really rushing to park their monies in them. The inflows into these schemes is not that substantial,” opined Sabnavis.

The interest rate on a one-year TD under small savings schemes is 6.9 per cent. One-year bank TD rate, according to the RBI’s Weekly Statistical Supplement, is 6-7.25 per cent.

“I don’t think that the one-year TD rate under small savings schemes is substantially higher than the corresponding maturity bank TD rate,” the BoB Chief Economist said.

The aggregate outstanding in small savings schemes increased from ₹18.65 lakh crore as at March-end 2024 to ₹19.82 lakh crore as at December 2024. Incrementally, this amount is not large. Incremental bank deposit growth was about ₹20 lakh crore last year.

“What the RBI staff are probably trying to say is that small savings rates, too, have to be lowered. Conceptually, these rates could be a hindrance for banks to lower their TD rates. But, practically speaking, it may not affect them much. So, it is a fair point.

“But I don’t think this is coming in the way of transmission. Moreover, from the point of view of the government, it is not a huge amount they are paying for these schemes,” Sabnavis said.

Ease of operation

Karthik Srinivasan, Senior Vice President and Group Head (Financial Sector Ratings), ICRA, noted that it is difficult to quantify the impact of relatively higher interest rates of small savings schemes on bank deposits, as the ease of operation of the latter is significantly different from the former.

“You can’t just go and withdraw your money from small savings. It is blocked. So, liquidity is not really there. But it’s practically zero risk, because it is effectively a government deposit.

“So, it could be difficult for banks to cut deposit rates materially when the government is offering you high interest rates through small savings deposits,” he said.

In such a scenario, Srinivasan emphasised, the only trade-off is how much a depositor values liquidity. “Are you okay putting your entire money in small savings deposit and saying, ‘I don’t mind if I get the money later’? Maybe not. You would want a lot more money in your bank account so that you can withdraw it immediately for your daily, operational requirements,” he said.

In the case of small savings schemes, there are certain caps — for instance, for the senior citizens deposit scheme, the maximum deposit limit is ₹30 lakh. In the case of monthly income scheme, the maximum investment limit is ₹9 lakh in a single account and ₹15 lakh in a joint account.

Srinivasan pointed out that the RBI has been stating that if small savings scheme rates are not reduced, then, beyond a point, it will be difficult for banks to further reduce deposit rates.

“You can always park some surplus money in small savings schemes. Let’s say, you have ₹10 lakh in your account. So, you can keep ₹8 lakh in bank deposits (assuming it is good enough for you to manage your near-term requirements) and park the rest in government schemes.

“Bankers can say that if a small savings instrument is offering 7.5 per cent, then they’ll offer 7.25 per cent. Technically, you can break that bank deposit tomorrow and take your money. At least they are providing that much liquidity,” he said.

So, banks can go as close to small savings scheme rates as possible, depending on their asset liability management and growth expectations.

Banking expert V Viswanathan observed that it is a stretch to say that in the reduced interest rate scenario, bank deposits may move towards small savings schemes if the former’s rates are not aligned with the formula rates.

“It appears that a message is being given to the government to reduce the interest rate on small savings schemes on an exaggerated impression that these schemes are competitors to bank deposits. The reality is that the savings segments and customers are totally different in both,” he said. Moreover, the small savings schemes portfolio is less than 9 per cent of SCB deposits in February 2025. The share of five-year time deposit plus senior citizens deposit scheme is just 1.5 per cent.

It remains to be seen whether the government will bite the bullet and cut the interest rates on various small savings instruments for Q2 FY26.

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Published on April 27, 2025