Small Savings Rate Cuts in 2025

• The government may delay the initiation of interest rate cuts on small savings schemes until April 2025 due to high inflation and upcoming Assembly elections.

• The last rate cut on small savings schemes was in April 2020, reducing the return on Public Provident Fund (PPF) savings to 7.1%.

• The Reserve Bank of India (RBI) reported that interest rates on various small savings instruments have been cumulatively increased in the range of 70 to 250 basis points (bps) since Q3 2022-23.

• The trend of easing government securities (G-sec) yields, to which small savings returns were linked in 2016, is likely to persist in the coming year.

• Interest rates on most small savings schemes are well above the corresponding G-sec yields, suggesting room for a cut in Q4 of 2024-2025.

• Bank of Baroda chief economist Madan Sabnavis agrees with the theoretical case for rate cuts, but believes this may not be the right time due to high inflation and a feeling that consumption is taking a hit.

• The inflows on account of savings deposits and certicates and the PPF have been tepid during April-October 2024, prompting the government to keep rates unchanged for the coming quarter.

• The interest rates on small savings schemes are likely to be pared from the April-June 2025 quarter onwards, aiding in the transmission of monetary policy.