Small Savings Scheme Returns Could Reduce, Know How RBI’s Rate Cut Can Impact Deposit Rates

The Reserve Bank of India (RBI) announced its decision to cut interest rates for the first time in nearly five years, on February 7, 2025. The repo rate was reduced by 0.25 per cent or 25 basis points from 6.5 per cent to 6.25 per cent. Following the rate cut, it is anticipated that the RBI will also cut the deposit rates on several small savings schemes.

Typically a rate cut leads to potentially lower mortgage and credit card interest rates and lower borrowing costs. However, the current rate cut might also lead to lower interest rates on the money deposited in fixed deposits (FDs) and several small savings schemes.

Why Will Interest Rates Lower After The Rate Cut?

Viral Bhatt, founder of Money Mantra, and a personal finance consultant says that interest rates for small savings schemes are likely to reduce because a lower repo rate leads to a decline in bond yields. While the interest rates for small savings schemes are not directly impacted by changes in RBI policy rates, they are linked to government bond yields.

“The interest rates on small savings schemes are reviewed quarterly and are linked to government bond yields. While these rates are not directly influenced by the RBI’s policy rates, a lower repo rate often leads to a decline in bond yields, increasing the likelihood of a reduction in small savings interest rates in future reviews,” Bhatt says.

Bhatt adds that the government is likely to adjust small savings rates in the coming financial year. He adds that changes typically take time to materialise and rate transmission is a gradual process.

“With the RBI cutting policy rates, the government may consider adjusting small savings rates in the coming financial year. However, any change typically takes time to materialise, as rate transmission occurs gradually. The next review, which determines the rates for the April-June quarter, will be closely watched for any revision,” Bhatt adds.

While interest rates on small savings schemes are likely to go down, a report by the Indian Express said that the interest rates for Mahila Samman Savings Scheme are unlikely to go down. At present, the deposit rate on Mahila Samman Savings Scheme is 7.5 per cent. While no announcements related to the scheme was made in Union Budget 2025, the government will have to pay a deposit rate of 7.5 per cent on the amount deposited by investors in the scheme for the next two years from the date of deposit, the last date of deposit being March 31, 2025.

The repayment for investors who had invested in the scheme before April 1, 2023 will start after March 31, 2025. Prevailing Interest Rates On Small Savings Schemes

The Centre announces the rate of interest for small savings schemes every quarter. Earlier on December 31, 2024, the Union Ministry of Finance announced its decision to keep interest rates unchanged for small savings schemes for the quarter beginning January 1, 2025. Notably the rates were kept unchanged for the fourth consecutive quarter. Here’s a look at the interest rates for some common small savings schemes:

Things To Consider Before Investing In Small Savings Schemes

According to Bhatt, investors can consider investing in small savings schemes before the interest rates are reduced. However, he added that investors should consider their financial goals and liquidity needs before investing in small savings schemes, as different schemes have different lock-in periods and withdrawal rules.

“Investors looking to secure current interest rates should consider making contributions to their preferred schemes before any potential rate cuts. Since these schemes come with varying lock-in periods and withdrawal rules, investors should align their choices with their financial goals and liquidity needs,” Bhatt adds.

As a part of the Union Budget 2025, the Union Ministry of Finance projected its borrowings from the NSSF (National Small Saving Fund) at Rs 3.43 lakh crore for the next fiscal.