Small savings rates to be cut in range of 9 to 118 basis points: RBI

The Reserve Bank of India (RBI) has requested a further reduction in interest rates on Small Savings Instruments (SSI) for the first quarter of the financial year 2022-23 at a time when some banks have raised interest rates. deposit. “Existing interest rates on SSIs need to be reduced within a range of 9 to 118 basis points for the first quarter of 2022-23 to bring them in line with formula-based rates,” he said. in its report “The State of the Economy”.

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The government is expected to review SSI interest rates for the first quarter of 2022-23 on March 31, 2022, he added.

Interest rates on SSI are administered by the government. They include the Public Provident Fund (PPF), Sukanya Samriddhi Account (SSA), Old People’s Savings Scheme (SCSS), National Savings Certificate (NSC) and postal deposits. PPF now earns 7.10%, SCSS 7.40% and the term deposits of the Post Office 5.5 to 6.7%. These interest rates will be valid for the period from January 1, 2021 to March 31, 2022.

These administered interest rates are linked to market yields on government securities (G-secs) with a lag and are set on a quarterly interval at a spread of 0 to 100 basis points (bps) over G-sec yields of comparable maturities. , says the report.

According to RBI data, the total SSIs outstanding in February 2021 was Rs 12.24 lakh crore. Of this amount, PPF accounts for Rs 95,170 crore, Post office deposits and NSS Rs 8.47,119 crore and Savings certificates like NSC Rs 2.82,482 crore.

Although interest rates on SSIs have fallen in line with the trend of the financial system, these instruments still offer higher rates than bank deposits. In fact, interest rates have fallen from around 40 basis points to more than one percentage point between January and November 2021. In addition, interest rates on long-term investments such as PPFs have dropped 1.5% over the past five years. The only negative factor is the lack of liquidity in these schemes.

The State Bank of India now offers 5% interest on term deposits for 1-2 years, 5.30% for 3-5 years and 4.40% for the 180-210 day category.

The Employees Provident Fund Organization (EPFO) recently cut interest rates on EPF from 8.5% to 8.1%, the lowest rate in four decades.

Meanwhile, according to the RBI, with the recovery in credit, some banks have raised interest rates on term deposits. The magnitude of the pass-through of the policy rate cut to the median term deposit rate (MTDR), which remained at 154 basis points between March 2020 and September 2021, fell slightly to 150 basis points in February 2022 The noticeable decline of 174 basis points is noticeable in the case of short-term deposits with a maturity of up to one year, the RBI said.

Across domestic banks, robust deposit growth has enabled private banks to better pass through term deposit rates relative to those in the public sector.

Since March 2020, the one-year median marginal cost of banks’ funds-based lending rate (MCLR) has eased cumulatively by 95 basis points. In response to the decline in the repo rate by 115 basis points, the weighted average lending rates (WALR) on fresh and outstanding loans in rupees declined by 140 basis points and 122 basis points, respectively, in during the period from March 2020 to January 2022, according to the Reserve Bank report.

Bank credit growth to the commercial sector, which crossed the 7.0% level in November 2021 for the first time since April 2020, increased to 7.9% on February 25, 2022 (6.6% a year ago). year), he added.

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