No final word on linking savings, inflation rates yet

NEW DELHI: The government said on Thursday that the GN Bajpai Committee report on linking interest rate on small savings with the prevailing inflation rate, was an option for fixing the rates for the next fiscal.

This reaction can be seen as a result of the article that ET carried in its edition dated February 17, where it was mentioned that the goverment was thinking of a link- up between the two rates.

Expenditure secretary D Swarup told reporters, “Implementing the recommendation (of the Bajpai Committee) is an option, not an obligation.�

He was replying to queries from the reporters on whether the government would revise the small savings rates, now averaging 8%.

The panel under the Sebi chairman GN Bajpai, appointed by the government, has suggested that interest rates on small savings be linked with the inflation rate. While this will cushion small investors against rising prices, the present rates of interest could dip marginally if the Centre acts on the expert advice, as the inflation rates have softened.

Earlier, a committee headed by YV Reddy, during his tenure as the deputy governor of the RBI, had suggested that the small savings rate should be benchmarked with the weighted average yield of government papers of the same maturity.

However, the NDA government could not implement the Reddy panel suggestion as it would have led to a reduction in the small savings rate.

Meanwhile, the Left parties have asked the government to ensure a parity in the rate of interest on these instruments, like PPF, with the new rate of 9.5% set for deposits with the Employees Provident Fund Organisation.

They have said that if private sector employees could get a higher rate of interest, there was no reason why government employees, who contribute to the Government Provident Fund (GPF), should earn a lower 8% rate of interest on their contributions.

The Bajpai Committee also made a suggestion that there should be a deposit scheme for senior citizens. This deposit scheme could offer a return that is above the current rate of inflation.

The justification for this scheme lies in the fact, that along with the senior citizens bond scheme, which offers a flat rate of interest of 9%, it will provide a twin safe haven for the elderly and especially the fixed income group.