With bond yields seeing a decline, the government is expected to slash the interest rates of small savings schemes including Public Provident Fund (PPF) for the coming July-September quarter. However, if the finance ministry cuts rates below 7 per cent, it would be the lowest since 1974. From April 1 to July 31, 1974, the interest rate stood at 5.8 per cent. Between August 1, 1974 and March 31, 1975, it was 7 per cent. The government currently revises interest rates for small savings schemes on a quarterly basis.
The interest rates offered on the small savings schemes are linked to government bond yields of the same maturity. Similarly, the PPF rate is linked to the 10-year government bond yield. For Q1FY21, the interest rates on small savings schemes were slashed by up to 1.4 percentage points, in line with moderation in bank deposit rates. The interest rate PPF was lowered by 80 basis points to 7.1 per cent.
In the near past, bankers had complained that high small savings rates prohibits them to cut their deposit rates immediately to check flight of savings.
Meanwhile, the Reserve Bank of India (RBI) last month released a notification announcing it was stopping the government of India 7.75 per cent (taxable) bond. The debt was considered safe among investors, especially retired employees, and offers a higher interest rate compared to other financial instruments including fixed deposits. "The Government of India (GoI), dated May 27, 2020, hereby announces that 7.75% Savings (Taxable) Bonds, 2018 shall cease for subscription with effect from the close of banking business on Thursday, the 28th of May 2020," RBI had said.