A merciless escalation: The Hindu Editorial on Small Savings

The government has recently increased returns on some small savings instruments. 0.1 to 0.3 percentage points for the current October-December quarter. Popular investment avenues for the middle class such as Public Provident Fund (PPF) and National Savings Certificate were abandoned. On paper, returns on these instruments are to be reset on a market-determined basis, with a spread of 0 to 100 basis points (one basis point 0.01%) on returns on government securities with comparable maturities. This has not been followed, it is evident even at a cursory glance, given the long pauses between rate changes. Returns in government securities have picked up pace this year after interest rates were hiked to check inflation. This month, the Reserve Bank of India (RBI) said that the interest rates offered on various schemes in the current quarter are 44 to 77 basis points lower than the formula-implied rates. For example, PPF should have earned 7.72% in this quarter instead of 7.1 percent. It is noteworthy that the central bank, which usually publishes formula-based small savings rates every month or two, did not disclose them from May to September, although in August it was noted that the current rates and formula -based spread rates had become ‘negative for most schemes’.

For households battling over 6% inflation since January, with price hikes of more than 7% in a few months, these modest hikes are not enough to lift sentiment. Keep in mind that this was the first change in rates for these schemes in 27 months – after drastic cuts of 0.5 and 1.4 percentage points across all schemes launched in April 2020. It is political considerations that still determine the trajectory of the nest of small savers. Egg size can be gauged from some of the recent times when rates were changed, or rolled back. The last time the rates were hiked was in January 2019, just before the Lok Sabha elections. In March 2021, the government had announced a further cut from 0.4% to 1.1%, but withdrew the decision overnight, citing a ‘surveillance’ amid an election campaign for five states. However, this latest change in small savings rates doesn’t make the cut, even as a token signal to voters in the upcoming elections. As top RBI officials warned earlier, negative returns have dire consequences for the economy if households, the largest lenders, stop stashing their savings in such fixed income instruments and banks. The next quarter should see a fair and healthy reset of returns to negate the inflationary dent on household savings.