The central government first announced a steep cut on the interest rates on small savings on the last day of the financial year 2020-21 and then reversed the order today morning citing “orders issued by oversight” as the reason.
What were the interest rate cuts introduced?
The Finance Minister took the entire world by surprise by announcing a reversal of the order of cutting interest rates to schemes including National Savings Certificates (NSC) and Public Provident Fund (PPF) that would have hurt the middle and the lower-middle class hardest had the government allowed their implementation.
The government announced a cut of up to 1.1% in interest rates in the first quarter of 2021-22. It would mean reduction of PPF interest from 7.1% to 6.4%; of NSC from 6.8% to 5.9%; of 5-year Senior Citizens Savings Scheme paid quarterly by 0.9%; of Sukanya Samriddhi Yojna from 7.6% to 6.9% and of Kisan Vikas Patra (KVP) by 0.7%.
According to experts, the government is reducing interest on small savings to finance its deficit that has widened due to severe lockdown restrictions and increased borrowings. But it has to withdraw the earlier order fearing strict backlash from the public.
Why was the order of interest rate cut withdrawn?
The rollback was announced at a time when Bengal and Assam voted for the second round of elections and the government fears that the decision to cut interest rates could fuel political reactions in poll-bound states. If implemented, it could have taken the interest rates on small savings to more than a four-decade low.