View: The cost of a rate-cut rollback and how to set it right

The government’s move to hastily withdraw the interest rates cut order on small savings schemes reflects poorly on governance. The finance minister Nirmala Sitharaman’s tweet that the orders (read to cut interest rates) were issued by “oversight” appears to be a face-saver.

Elections are underway in five crucial states, inflation is rising, and the country facing the second wave of the pandemic that has hurt incomes and livelihoods. A crucial policy decision on cutting the administered interest rate on small savings ought to have been thought through well.

Although the interest rate in small savings is benchmarked to the yield on ten-year g-secs (that is around 6%), the revised rates (that have now been withdrawn) were lower than this bench-mark, showing that the government also reneged on its original promise. Hurting small savers even further makes no sense.


Where will scores of small savers and pensioners, whose returns have dipped over the years, invest? The best way the government can help them is to launch inflation indexed bonds that protect both the principal amount and the interest from the harsh effect of inflation.

This makes sense as the appetite for risk in this segment to invest in equity is low, and some savings can be invested in bonds. Preserving the value of the principal and offering a positive rate of interest in real terms, after netting out the rate of inflation, will be a decent savings option for small savers, especially pensioners.