Govt hikes interest rates on some small savings schemes by 20-110 bps for January-March

The finance ministry has raised the interest rates on some small savings schemes for the January-March quarter, the second quarterly increase in a row. The rates on the various instruments have been raised between 20 to 110 basis points and now range from 4.0 percent to 7.6 percent, according to a statement on December 30.

The small savings interest rates, while set by the government, are linked to market yields on government securities at a spread of 0-100 basis points over the yield of these securities of comparable maturities. However, interest rates on small savings have not always tracked the movement in market rates.

The Centre had increased the interest rates on these popular instruments by 10-30 basis points for October-December after leaving them unchanged for nine consecutive quarters. This was despite yields on government securities falling in the reference period by 15-25 basis points.

Interest rates in the economy have risen sharply amid sharp rate increases by the central bank, which has increased its key policy rate by 225 basis points since April in a bid to contain inflation. Banks have also followed suit, raising both lending and deposit rates for their customers.

In its most recent Monetary Policy Report, released on September 30, the Reserve Bank of India (RBI) had noted that with government bond yields moving higher, the revised small savings rates were 44-77 basis points below the formula implied rates.

In September-November, which is the reference period for small savings interest rates for January-March, the yield on five-year government bonds rose by around 15 basis points, while 10-year bond yields increased by 10 basis points over the same period.