The Finance Ministry on Wednesday said there will no change in the interest rate on small savings for the three months period starting October 1. These schemes include the National Savings Certificates (NSC) and Public Provident Fund (PPF), among others.

Not changing the rate is critical as it will help in collecting more money under small savings. This will, in turn, help the Government borrow more from small savings funds. This is the second successive quarter of no change in the interest rates.

In the last couple of months, banks have lowered interest rate on all types of term deposits and on the savings account. This has put pressure on the Government to cut rates on small savings, but it refused to relent this time. Banks say that small savings schemes are attractive because of the higher interest rates and tax benefits, and that hurts mobilisation of bank deposits. It also affects the transmission of policy rate cuts, which is why the RBI has also advocated rate rationalisation on small savings.

The small savings schemes basket comprises 12 instruments including the National Saving Certificate (NSC), Public Provident Fund (PPF), Kisan Vikas Patra (KVP) and Sukanya Samridihi Scheme. The government resets the interest rate at the beginning of every quarter.

Theoretically, since 2016, interest rate resetting has been done based on yields of government securities of the corresponding maturity with some spread on the scheme for senior citizens, as advised by the Shyamala Gopinath Committee. However, in practice, the interest rate changes are made considering several other factors, including political ones.

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