India Post: Finance Ministry rejects postal deposit rate hike move

The primary reason behind the finance ministry’s rejection is that an increase in interest rates would result in a proportional increase in the on-lending rate to states.

In a move that will disappoint millions of Indians who have small savings deposits in post offices, the finance ministry has rejected the demand by the postal department to increase the interest rates on deposits and small savings schemes.

At present, those who utilize the small savings schemes of the postal department get an interest of 9.5 pct; the rate has been constant for the past 25 years.

The primary reason behind the finance ministry’s rejection is that an increase in interest rates would result in a proportional increase in the on-lending rate to states. Additionally, all states have indicated to the ministry that they didn’t want an increase in their cost of borrowing from the National Small Savings Fund (NSSF).

The finance ministry, in its response to the postal department, said, “Interest rates of small savings schemes are benchmarked to the average yields on g-g-secs of comparable maturity in the secondary market as recommended by the expert committee on administrated interest rates under the chairmanship of the deputy governor of RBI, and reviewed from time to time. At present, there is no proposal under consideration of the government to increase the interest rates on small savings schemes.”

This also marks the second instance of the ministry rejecting the postal department’s demand to hike interest rates. The finance ministry has also pointed out that state governments were already uncomfortable with the 9.5pct rate and any increase would only lead to a higher debt servicing cost, which in turn would throw their efforts at achieving fiscal correction out of gear.

Additionally, the finance ministry has also said the NDC sub-committee has recommended that the interest on borrowings from NSSF be scaled down to 7.5pct