India makes small savings more attractive, tweaks structure

India has made small savings more attractive in an effort to woo small investors and enlarge the national savings pool, a notification from the finance ministry on Friday showed. The government borrows money from this pool of small savings to finance its deficit, but for the current fiscal year, the finance ministry had to resort to higher-than-budgeted market borrowings by as much as 530 billion rupees ($10.57 bn) as there were insufficient funds in the National Small Savings Fund.
The rate of interest paid under the Post Office Savings Account has been increased by 50 basis points to 4 percent while the annual ceiling on investment under the Public Provident Fund (PPF) has been increased from 70,000 rupees to 100,000 rupees. Also, the rate of interest on small savings schemes will be aligned with rates of government securities of similar maturity, with a spread of 25 basis points, a long pending reform in the area of small savings.
"The government had constituted a committee on 8th July, 2010, headed by Shyamala Gopinath, the then deputy governor, Reserve Bank of India, for comprehensive review of NSSF," said a late evening notification from the finance ministry on Friday. "The terms of reference of the committee included review of the existing parameters for the small saving schemes in operation and recommend mechanisms to make them more flexible and market linked", it said.
The higher than budgeted borrowings for the current fiscal year led to benchmark yields shooting up, raising borrowing costs for the government and crowding out private investment. The most-traded, new 10-year 8.79 percent, 2021 bond closed at 8.94 percent from Wednesday's close of 8.90 percent, but off the day's high of 9 percent, following auction results and on central bank deputy's comments that growth was clearly in a slowdown and the interest rate cycle had likely reached its peak.
The higher government borrowings had piled pressure on the government to revisit the structure and pricing of small savings, under intense pressure from bank deposits to attract investments. Rising interest rates had led to more people parking money in bank deposits rather than small savings like the National Savings Certificates or the Public Provident Fund. The minimum share in annual net small savings collections for states have been reduced to 50 percent from the current 80 percent, giving the federal government greater access to the funds in the NSSF.