The significance of small saving schemes

• Small Savings Schemes, also known as Post Office Savings Schemes, are a popular method for saving, with high credit quality and competitive interest rates.

• The government sets interest rates on these schemes every quarter, with the current quarter’s rates announced on March 31.

• The rate of interest on these schemes is aligned with Government Security (G-Sec) rates of similar maturity with a spread or mark-up.

• The rate is reviewed every quarter, but not revised downward every quarter, even when G-Sec rates are falling.

• Prevailing rates include the Post Office Savings Deposit rate of 4%, Public Provident Fund (PPF), Post Office Term deposits of 1, 2, and 3-year maturity, and Senior Citizen Savings Scheme (SCSS).

• The Reserve Bank of India (RBI) has been reducing the reference repo rate, which is now at 6%.

• The reference G-Sec yield levels for the period December 2024 to February 2025 are lower, implying that the reference point for next quarter will be lower.

• The ‘Generosity component’ or ‘Z’ component in the current prevailing Small Savings rates is expected to increase with the reference rate coming down.

• The government may need to maintain current rates due to political implications of cutting them, putting pressure on the government’s finances.