RBI rate cut expected to benefit government fiscal but reduce returns for savers

The government’s borrowing costs are set to soften following the Reserve Bank of India’s (RBI) anticipated rate cut, government officials said. Somewhat lower interest rates are also likely for small savings schemes and bank deposits, as and how the savings instruments come up for renewals or a rate revision, officials indicate.

The 25 bps repo rate cut by the RBI could translate into lower yields on government bonds, making it cheaper for the government to raise funds. With lower yields, the government’s borrowing program for the next fiscal year could become more manageable, easing fiscal pressures.

A fall in government bond yields typically influences interest rates offered on government-run small savings schemes such as the Public Provident Fund (PPF), National Savings Certificate (NSC), and Senior Citizen Savings Scheme (SCSS). These schemes offer higher returns than bank deposits and the government periodically revises their rates based on bond yields. A reduction in G-sec yields could lead to a cut in small savings rates in the coming quarters.

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The government will revisit the interest rates for a host of small savings schemes end of March, with the new rate structure coming into effect from April 1, for the April-June quarter of the new financial year.

Small savings constitute a significant part of financing the government’s fiscal deficit although in the last 2 years, small savings mop-up has been undershooting the budget targets. The government too is relying less on small savings for financing its deficit as the borrowing cost is a tad higher.

With a lower repo rate and declining bond yields, Banks too, are likely to align their interest rates on fixed deposits with the broader economy.

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