Last week, India’s central bank, the Reserve Bank of India (RBI), sprang a surprise by doing something it hadn’t done in four years. It hiked its benchmark repo rate by 40 basis points (bps), going from 4% to 4.4% (100 basis points is 1 percentage point). The steep hike was out of turn, coming almost a month before the monetary policy meeting scheduled in June.
Jitters over the steadily climbing inflation seem to have forced the RBI to act sooner than anticipated. The repo rate is the interest rate at which the RBI lends to other banks. So the rate hikes, which reduce the flow of money in the economy, are meant to keep inflation under check. Data released on 12 May shows that retail inflation in April surged to an eight-year high of 7.79%, far higher than the RBI’s threshold of 6%. More rate hikes are expected over the coming year, with the next one possibly in the next month itself when the Monetary Policy Committee meets.
While this is bad news for borrowers who will have to pay more interest on their loans, it’s good news for bank depositors who can finally expect to get more bang for their buck after years of low returns. The interest rate up-cycle has finally begun in India; banks have already pushed up their deposit rates.
However, one set of depositors may be left out of the upcycle—those who invest in small savings schemes (SSS). These government-run schemes offered by the post office and some banks include popular investments such as the Public Provident Fund (PPF), National Savings Certificate (NSC), Senior Citizens Savings Scheme (SCSS), Sukanya Samriddhi Account (SSA) and post office deposits.
The interest rates for SSS are meant to be formulaic—based on the prevailing rate on Government Securities (G-secs) of a similar tenure plus a mark-up. And they are meant to be reset every quarter by the government, a practice that began in April 2016.
Except they haven’t been.
G-sec rates have been rising in the past few months but SSS rates haven’t been hiked correspondingly. And it’s unlikely that they will be hiked in the next reset in end-June. That’s because, for the most part, the government hasn’t followed the formula-based rate reset.
Over the past couple of years, most interest rates in the country—including the repo rate—fell sharply. So did the rates on bank deposits and G-secs. Logically, the SSS rates should have fallen as well, but the government chose not to cut them. The last cut was in April 2020 when the rates were broadly aligned with the formula rates.
For instance, while the formula rate on the NSC for the April to June 2022 quarter should be 6.49%, the declared rate was 6.8%.