2025 may ring in small savings rate cuts

Investors in small savings schemes should prepare for interest rate cuts, with the first reduction possibly coming soon.

Investors in small savings schemes should brace themselves for a year of interest rate cuts, and the first reduction in returns on these schemes may come as early as this week when the government resets rates for the January to March quarter.

While the case for a rate cutting cycle is in place starting with the upcoming quarter, the government may defer its initiation till April for better optics as a reduction amid high inflation, with an important Assembly election around the corner, may not go down well, experts believe.

The government had last slashed rates on small savings schemes in April 2020, in the range of 0.5% and 1.4% on different instruments, bringing the return on Public Provident Fund (PPF) savings to 7.1% from 7.9% prevalent till then. Although the PPF rate has remained unchanged since then, the Centre began hiking rates on other small savings instruments from October 2022.

“Since Q3 [third quarter] of 2022-23, interest rates on various small savings instruments have been cumulatively increased in the range of 70-250 basis points (bps) by the Government of India [GoI],” the Reserve Bank of India had noted in its October bulletin. One basis point equals 0.01%.

“The GoI kept rates on small savings schemes unchanged for Q3:2024-25. Rates on most of the small savings instruments are now above the formula-based rates, except rates on public provident funds and post office recurring deposits,” the RBI had noted, estimating the Q3 returns were a tad under 40 bps higher than the formula for most schemes.

Since October, government securities (G-sec) yields, to which small savings returns were linked in 2016 based on a formula, have eased further, and that trend is likely to persist in the coming year.

“The interest rates on most small savings schemes are well above the corresponding G-sec yields, with the spreads between the two widening further over the acceptable levels during the last few months, owing to a dip in the latter during this period. This suggests that there is room to cut small savings rates for Q4 of 2024-2025,” Aditi Nayar, ICRA chief economist, told The Hindu.