Interest rates on some small savings schemes hiked by 10-30 bps for July-September

The Central government has raised interest rates on some small savings schemes for July-September – the fourth quarterly increase in a row. The rates on some of these instruments have been raised by 10-30 basis points and now range from 4.0 percent to 8.2 percent, the finance ministry said on June 30.

The instruments on which interest rates have been increased are the following: 1- and 3-year time deposits (10-basis-point increase for both) and 5-year recurring deposit (30-basis-point increase). All other small savings schemes will continue to offer the same rate of interest as they did in April-June.

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, when market yields on government securities rise or fall during the reference period, interest rates on small savings schemes should move in the same direction as per the government's own formula.

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

However, in March-May, which is the reference period for small savings interest rates for July-September, government bond yields fell sharply. While five-year bond yields fell by around 50 basis points, those of 10-year bonds declined by roughly 45 basis points. Further, yield on the government's 364-day Treasury bill fell by more than 30 basis points in March-May.

After leaving the small savings interest rates unchanged for nine consecutive quarters, the government increased these rates in October-December 2022 by 10-30 basis points and then again in the first two quarters of 2023 – by 20-100 basis points and 10-70 basis points, respectively. This, the Reserve Bank of India (RBI) had noted in its April edition of the Monetary Policy Report, meant the rates had finally become "closely aligned with the formula-based rates".