The rate increases on some small savings schemes for this quarter could make it tougher for banks to raise deposits and compel them to raise rates, the Reserve Bank of India (RBI) has said.
For the January-March 2023 quarter, the government has raised interest rates on eight of 12 small savings instruments, including a minimal 20 basis points (bps) increase for the National Savings Certificate and Kisan Vikas Patra and a 110 bps higher return on one-, two- and three- year time deposits. One basis point (bp) equals 0.01%.
Returns on the Public Provident Fund (PPF) and the Sukanya Samriddhi Account scheme were left unchanged at 7.1% and 7.6%, prevalent since April 2020. Interest rates on small savings schemes are fixed on a quarterly basis with a spread of 0-100 bps over and above the yields on government securities of comparable maturities.
The returns for the October to December 2022 quarter, were 44-77 bps than the formula-determined rates, the RBI had said in its October bulletin. The PPF and the Sukanya Samriddhi scheme should have earned 7.72% at 8.22% in the previous quarter, it said.
Although it has not shared details on how the revised small savings rates square up with the formula-based returns in its latest bulletin, the central bank has reiterated its concerns about the implications of these increases for banks.
“The increase in rates on small savings schemes may pose competition to banks for raising deposits, and banks may be prompted to further increase their retail deposit rates,” it has said.
When small savings rates were held higher than the formula-based rates through 2021, the RBI had repeatedly flagged concerns about their impact on monetary transmission and the competitive pressure they pose on banks’ ability to raise retail deposits, especially for public sector banks. The RBI’s bulletins for April, June, July and October, made a reference to the issue.
In October 2021, it noted: “With the moderation in interest rates on bank deposits and unchanged interest rates on small savings, the latter have become attractive to depositors. The growth in accretions under small savings has consistently been above that of bank deposits since 2018 and the gap has widened, with implications for monetary transmission as and when credit demand picks up.”
For that quarter (October-December 2021), small savings schemes’ returns were 47-178 bps higher than the formula-based rates.