In a move that will hit common man, the government on Friday slashed interest rates on all small savings schemes, including PPF, Kisan Vikas Patra (KVP) and senior citizen deposits, to make them more market aligned.
Interest rate on Public Provident Fund (PPF) scheme has been cut to 8.1 per cent for the period April 1 to June 30, from 8.7 per cent, at present.
Similarly, the interest rate on KVP will be reduced to 7.8 per cent from 8.7 per cent while senior citizen savings scheme of five years would earn 8.6 per cent interest compared with 9.3 per cent.
Girl-child saving scheme, Sukanya Samriddhi Account will see interest rate of 8.6 per cent as against 9.2 per cent, according to a Finance Ministry order.
Terming the decision slashing of interest rates as a "normal exercise of resetting" rates in March every year, Economic Affairs Secretary Shaktikanta Das said, "this will enable banks to consequently reduce their deposit rates and extend loan and credit to public and borrowers at lower rates."
However, unlike previous years when interest rates were set for the full year, the government will from now on set interest rates every quarter based on previous three-month yields on Government-Securities or G-Sec.
While the interest rate on Post Office savings has been retained at 4 per cent, the same for term deposits of one to five years has been cut.
The popular Five-Year National Savings Certificates will earn an interest rate of 8.1 per cent from April 1 as against 8.5 per cent, at present.
A five-year Monthly Income Account will fetch 7.8 per cent as opposed to 8.4 per cent now.
"This is being done to make small saving interest rates more market linked and more market aligned," Das told reporters.
Asked when banks will cut rates, he said, "Banks will have to decide on their own. Government has given signals to them. It is for the banks to take decision and move forward."
Post Office term deposits of one, two and three years command an interest rate of 8.4 per cent but from April 1, a one-year Time Deposit will get 7.1 per cent, two-year Time Deposit will earn 7.2 per cent and 3-Year Time Deposit will attract interest of 7.4 per cent.
Five-year time deposit will fetch 7.9 per cent interest in the first quarter as against 8.5 per cent while the same on five-year recurring deposit has been slashed to 7.4 per cent from 8.4 per cent.
"On the basis of the decisions of the government, interest rates for small savings schemes are to be notified on quarterly basis," the order said announcing the rates for the first quarter of fiscal 2016-17.
The government had on February 16 announced moving small saving interest rates closer to market rates. On that day, rates on short-term post office deposits was cut by 0.25 per cent but long-term instruments such as MIS, PPF, senior citizen and girl child schemes were left untouched.
Post office savings of 1, 2 and 3 year term deposits, Kisan Vikas Patra (KVP) as well as 5-year Recurring Deposits till now earned 0.25 per cent higher interest than the government securities of similar tenures.
This advantage has been withdrawn with effect from April 1, 2016, the Finance Ministry said.
On February 16, the government had left Sukanya Samriddhi Yojana, Senior Citizen Savings Scheme and the Monthly Income Scheme (MIS) -- which command 0.75 per cent, 1 per cent and 0.25 per cent higher interest rate respectively than G-secs -- untouched, saying they are linked to social security goals.
Similarly, long-term instruments such as 5-year term deposit and similar tenure National Saving Certificates as well as Public Provident Fund (PPF) had been left unchanged.
But today, the interest rates on all these deposits have been cut.
Kisan Vikas Patra or KVP that currently provides for doubling of principal in 100 months (8 years and 4 months) will now be doubled in 110 months (9 years and 2 months) after the interest rate revision.
In February, the government had stated that the cut in small savings interest rate would help the economy move to "a lower overall interest rate regime eventually and thereby help all, particularly low-income and salaried classes".
The government has also permitted premature closure of PPF accounts "in genuine cases", like serious ailment or higher education of children.
"This shall be permitted with a penalty of 1 per cent reduction in interest payable on the whole deposit and only for the accounts having completed five years from the date of opening," it added.
The interest rate for every quarter would be decided on the 15th of the preceding month.
So, for the April-June quarter, rates should have been set on March 15 but they were delayed. The rates for April-June quarter are based on G-Sec rates that prevailed in the previous three months -- that is December, January and February.
Interest rate for July-September quarter will be announced on June 15, Das said.