By Deepshikha Sikarwar, ET Bureau | 23 Jan, 2016, 10.31AM IST | Economic Times

NEW DELHI: Interest rates on popular small savings schemes such as Public Provident Fund (PPF), National Savings Certificate (NSC) and the Kisan Vikas Patra could soon be reset every quarter as part of the government’s plan to peg them closer to market rates to reduce market distortions and help the cause of lower interest rates.

The government will also reduce the mark-up over the benchmark government bond rate for such schemes of small maturities to nudge short term rates lower.

High interest rates on small savings schemes have long been cited as a structural barrier to interest rates coming down as they compete with bank deposits, but are not subject to the same kind of market pressures as them. Because they stay high, bank deposit rates are forced to remain high and therefore prevent lending rates from coming down.

A senior government official said the first reset under the new rules will happen from April 1 this year and rates are expected to fall. A notification will be issued soon, this official said, adding that interest rates on schemes for senior citizens and a scheme for girl children were not likely to be revised.

Small savings’ interest rates are linked to yields on government bonds of comparable tenure, but unlike gilts that are traded daily and see yields change, these change only sparingly.. The last revision in rates on these schemes was on April 1last year. Since then, market rates have moved south following a 0.75 percentage point policy rate cut by the Reserve Bank of India, creating a wide wedge between what the banks can offer and what is available on small savings.

State Bank of India, for example, offers 7 per cent on deposits of maturity of five years or more. Deposits of such tenure fetch 8.5 per cent in a post office small savings account. The PPF rate for a similar maturity is 8.7 per cent. This wide gap between small savings’ and market rates impacts deposit mobilisation by banks as their ability to reduce deposit rates is adversely impacted. This impacts banks’ ability to lower lending rates as well.

A quarterly reset of small savings rate will ensure that distortion in the rates caused by the small savings is kept to a minimum, officials said. The weighted average yield of dated government securities was 7.9 per cent in April-September 2015 compared with 8.81 per cent in the first half of the preceding year, potentially opening up the possibility of an up to one percentage point reduction in the small savings rate.

In their pre-budget meeting with Finance Minister Arun Jaitley earlier this month, banks and financial institutions had also suggested quarterly benchmarking of rates.

Source : http://goo.gl/LBLfSt