Finance Minister corrects mistakes on rate cuts

Finance Minister: The government on Thursday quickly recalled an order extremely reducing interest rates on small savings. Schemes like post office deposits and public provident fund, with finance minister Nirmala Sitharaman, credit it to ‘oversight’.

Moreover, the recall was seeing to be a political decision as the rate cut coinciding with the crucial second phase of elections in West Bengal. Which is the top source of small savings deposits on a gross basis. Also, most phases of the ongoing assembly elections are still to roll out. And the cuts we’re seeing hurt traditional savings choices, particularly among senior citizens.

However, sources said the order was issuing due to some communication gap. On Wednesday evening. The FM’s office was looking into a global report on the gender gap and had sought data on women depositors and the Sukanya Samridhi scheme. With the file cleared by the “competent authority”. A reference to officials, the message did not percolate clearly and the order slashing rates was issuing around 8 PM.

Sitharaman was briefing about it late at night and she tweeted early Thursday, holding back the decision. As a result, interest rates, which were to fall by as much as 1.1 percentage point will remain unchanged up to June, Sitharaman said, less than 12 hours after her ministry had slashed them. Which would have seen returns on PPF fall to the lowest level in almost 47 years.

The government has been facing criticism for not cutting taxes on petrol and diesel. Deciding to tax interest earned by private-sector employees on annual provident fund contribution of over Rs. 2.5 lakh. Besides, falling interest rates, returns on fixed deposits barely cover inflation. Which in any case has remained elevated due to food prices. 

Reserve Bank of India’s policy rates;

Given the wide user base, decisions to alter rates are taking after consultations at multiple levels in the government. This time, the need to reduce rates was seen to be greater as bank deposit rates had to drop in line with the Reserve Bank of India‘s policy rates. But small savings rates had been left unchanged since April 2020, although they are to be reset every quarter.

However, the step seemed to have been pushed through without adequately weighing the overall impact on savers as well as the broader political economy. Small savings and provident fund are seeing to be safe instruments that not only help the middle class build a retirement corpus. But also take care of post-retirement needs through products such as senior citizens’ savings schemes.

In April, at the start of the last financial year, the government had slashed interest rates by up to 1.4 percentage points.