Why is the government cutting down interest rate for small savings instruments?
@Sohini The finance ministry has decided to cut interest rates for small saving instruments to bring uniformity in interest rates between banks, government securities and small saving instruments.
The improving economic conditions have lead to a constant decline in the RBI repo rate cuts. Banks are now passing on the lower interest rates to customers. With banks charging low interest rates they have no choice but to bring down their fixed deposit rates as well.
If small security instruments continue to hold interest rate advantages, it will lead to a situation where banks will not attract any new deposits. So it is all a level playing field with rate cuts from small saving instruments.
Interest rates on small savings schemes were earlier set for a full year based on yields from Government securities in the previous year.
Now the interest rates are being reset once every quarter and will be based on the previous 3 months yield from Government securities. This means that now that the rates have been reset on April 1, the next change in interest rates will come on July 1. Also, the interest rates will be decided on the 15th of the previous month. For example, if rates are to be reset on July 1, the new rates will be decided by 15th of June. This gives you time to plan your investments or move your investments, if needed.
Why are interest rates being cut? Consider this: the yield on the ten-year benchmark Government security has fallen from 7.87% in February 2016 to 7.44% now. Given this steep fall, it is no surprise that small saving schemes, which are linked to Government securities, will be earning lower returns.
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