Rates lowered, but small savings still have a fighting chance

March 25, 2013:  

Investors may be unhappy about the cuts announced in the interest rates on small savings schemes for the next year.

These rates are calculated based on the average yields on government securities in the preceding year.

But the new small savings rates are quite competitive in relation to alternative instruments such as bank deposits.

The government has reduced the rates offered by small savings schemes only by 10 basis points (0.1 percentage point) for the year beginning April 2013.

Contrast this with the sharp decline in interest rates in this period. Between April 2012 and now, RBI has cut its own policy rates by 75 basis points. Banks have slashed their deposit rates by a similar degree. Three-year bank deposits, which offered an average interest of about 9.25 per cent last April, now pay only 8.7 per cent.

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