Govt. faces Hobson’s choice on interest rates

High inflation, decline in savings, make it a tough call for Govt. to reduce rates on small savings schemes, say economists

The government has a tricky political decision to make over the next couple of days, with the quarterly reset of interest rates on small savings schemes due on June 30. A cut in small savings rates at this point would be an ‘unpopular’ move and further hurt households amid a surge in inflation, according to economists. Sharp cuts in the rates for the current quarter on instruments like the Public Provident Fund (PPF) and National Savings Certificates (NSCs) announced on March 31, were rolled back within hours amid the West Bengal Assembly election campaign. While there are no polls around the corner now, retail inflation has shot up sharply to 6.3% in May this year after averaging 6.2% through 2020-21. Inflation is expected to stay elevated around 5.5%-6% through 2021-22. Moreover, household savings have been shrinking significantly for two quarters in a row even before the second COVID wave, as per recent Reserve Bank of India (RBI) data on savings rates for the third quarter of 2020-21.