The repo rate cut announced by the Reserve Bank on Tuesday is likely to bring much-needed relief to borrowers, but the move wouldn't impress millions of investors who depend on small savings instruments such as public provident fund (PPF) and Sukanya Samriddhi to earn tax free income.
According to research agency India Ratings, the 25-basis-point rate cut, coupled with measures to ease liquidity, could bring down small savings rate by 20 to 25 basis points during the July-September quarter. One basis point is equal to one-hundredth of a percentage point.
This means interest rate on PPF, for example, could fall to between 7.85 per cent and 7.9 per cent in the fiscal second quarter.
According to the new small savings scheme rules which came into effect from April 1, interest rates will be revised every quarter, based on the previous 3-month yields on benchmark government securities or bonds with a small mark-up. Earlier, interest rates were set for the full year.
For the April quarter, the government cut the interest rate on small savings schemes sharply, following a slide in benchmark government securities rate.
As a result, interest rate on PPF was set sharply lower at 8.1 per cent for the period April 1 to June 30, down from 8.7 per cent. Senior citizen savings scheme of five years would earn 8.6 per cent interest compared to 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.
The RBI's liquidity injection measures are meant to pump enough cash into the banking system, allowing the sector to cut lending rates and pass on the lower borrowing costs to the broader economy.
Analysts say that the measures taken by the RBI on Tuesday will help to bring down yields of government bonds. Small savings collections are generally invested in government securities and a small amount is invested as loans in India Infrastructure Finance Company, according to India Ratings. (Watch)
The interest rate on small savings schemes for every quarter, under the new rules, would be decided on the 15th of the preceding month. Interest rate for July-September quarter will be announced on June 15.