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Chidambaram rejects demand for hike in post office small savings rates
May, 08th 2007
Says average G-sec yields will continue to be rate benchmarks

The Finance Minister, Mr P. Chidambaram, has rejected demand for an increase in the interest rate of small savings deposits in post offices, stating that States are averse to any further hike in their cost of borrowing from the national small savings fund (NSSF).

He also said that administered interest rates on small savings would continue to be benchmarked against average Government securities (G-sec) yields.

Responding to a calling attention motion on interest rates on small savings schemes, moved by CPI leader, Mr Gurudas Dasgupta, in Lok Sabha, the Finance Minister said that any increase in small savings deposit rates would require a concomitant increase in the on-lending rate to the States.

"The State Governments have not been comfortable even with the existing rate of 9.5 per cent for 25 years. They would resist any increase, as the higher debt servicing cost would undermine their effort at achieving fiscal correction," he said.

He pointed out that a NDC sub-committee has already recommended that interest on borrowings from NSSF be reduced to 7.5 per cent.

With the States also insisting that they should not be obliged to borrow 100 per cent of the small savings collections from that State, Mr Chidambaram said that plans are afoot to allow India Infrastructure Finance Company Ltd (IIFCL) to access some NSSF funds. "We are working on it (guidelines for allowing IIFCL to access the NSSF funds)," he said.

Net collections

Mr Chidambaram said that net collections (gross collections minus withdrawals) under the small savings scheme still remain positive and there was no evidence of any net outflow of deposits from such schemes.

Net collections under small savings schemes have declined 38.93 per cent in April-February 2006-07 to Rs 45,191 crore as against Rs 74,002 crore collected in the same period the previous fiscal.

"Withdrawal does not mean that people are abandoning the postal savings. I do not envisage a situation where the small savings scheme would wither away. It is possible that some funds are shifting from post offices to banks. This is not a bad thing," he said.

Mr Chidambaram noted that the benchmark yield for Government securities of shorter maturities (1-year/2 year) are higher by 69 basis points and 61 basis points, respectively, compared to the rates on 1-year/2-years post office time deposits.

However, three-year time deposit rates are on par with the G-sec yields and in the case of medium and longer maturities of 5 years and above, the small savings rates still enjoy a spread ranging from two basis points to 152 basis points.

For senior citizens

Insofar as senior citizens are concerned, their deposits under the 5-year senior citizens schemes enjoy a spread of 152 basis points over g-sec yield for comparable maturity.

Mr Gurudas Dasgupta wanted the Finance Minister to increase the interest rates of small savings in post offices and bring it at par with the interest rate offered by banks so as to prevent outflow of deposits from small savings schemes into the banking system.

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