Small savings schemes' interest rates for April-June may see third straight hike

Interest rates on small savings rose in late 2022 after being left untouched for nearly two years.

Interest rates on small savings schemes may be increased for the third quarter in a row in April-June 2023 – at least if the government decides to follow its own rules.

These interest rates for the first quarter of 2023-24 are scheduled to be released later today on March 31. And while they were left unchanged for nine straight quarters, the last six months have seen them being increased by 30-140 basis points.

One basis point is one-hundredth of a percentage point.

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. As such, with market yields on government securities rising during the reference period, interest rates on small savings schemes should also rise.

In December 2022-February 2023, which is the reference period for small savings interest rates for April-June 2023, yield on five-year government bonds rose by around 30 basis points, while 10-year bond yields rose by just under 20 basis points.

Government bond yields had crashed following the onset of the coronavirus pandemic in early 2020 as the Reserve Bank of India (RBI) infused extraordinary amounts of liquidity to ensure financial stability. While this should have resulted in a decline in small savings interest rates, the government left them untouched for nine quarters.

Any increase that the government announces in small savings interest rates for the next quarter would be on top of an increase of 10-30 basis points announced for October-December 2022 and 20-110 basis points for January-March 2023.

After the rates were hiked for January-March 2023, RBI staff noted in the February edition of their State of the Economy article that interest rates on post office term deposits of up to three years "are now closely aligned with formula-based rates".

In January, RBI staff had pointed out that the increase in small savings interest rates "may pose competition to banks for raising deposits, and banks may be prompted to further increase their retail deposit rates".