Context:

• The government has decided to leave the interest rates on small savings instruments for the upcoming July-September quarter unchanged.
• The Public Provident Fund (PPF) and National Savings Certificate (NSC) will continue to earn an annual interest of 7.1 percent and 6.8 percent, respectively.

Reviewing of small savings rates:

• Small savings rates are reviewed on a quarterly basis. In the April-June quarter.

Impact on savers by the change in rates:

• Higher Income: A large number of citizens invest their savings in these instruments which yield much higher income than bank deposits and are also backed by the sovereign.

Impact on banks:

• The disconnect between small savings rates and bank deposit rates sometimes creates problems for the process of monetary transmission.
• If small savings rates are high, commercial banks have to keep deposit rates competitive. This, in turn, affects their ability to price loans cheaply. 

RBI view:

• In the past, the central bank has made a case for aligning small savings rates more closely with the market.
• The distortionary effects of administered interest rates and tax incentives on small saving schemes have often raised policy issues in the context of higher interest costs, fiscal burden, and implications for private investment.

Current Scenario on Interest Rates:

• Since February 2019, the Reserve Bank of India’s monetary policy committee (MPC) has lowered the repo rate by 225 basis points to four percent to push economic growth. 
• The message to the system is to keep lending cheap, which also means that deposits turn cheap as well. But deposit rates are hard to cut when small savings schemes compete with them.

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