The government has slashed the interest rates on Public Provident Fund (PPF), Kissan Vikas Patra, Post Office Time, NSC, Senior Citixens Saving Scheme, Time Deposits and the Sukanya Samriddhi Account Scheme.

What is interesting is that the interest rates would be reviewed every quarter, unlike in the past where there may have been a yearly revision.

Henceforth, all interest rates will be aligned in line with the rates for G-Sec. The spread would be accordingly applied by the government depending on the type of spread. For example, in the case of the PPF interest rates it would be 25 basis points over and above the G-Sec rate, for senior citizens it would be 100 basis points above it, Sukanya Samridhi Scheme it is 75 basis points, and 25 basis points for five year time deposit, 25 basis points for National Savings Certificate and 25 basis points for Monthly Income Scheme.

The move by the government to slash interest rates could be a blow to retired folk, who park bulk of their saving in schemes of the post office. There is unlikely to be any backlash as such.

For long it was felt that banks could not reduce their lending rates, because they could not reduce their deposit rates. This was because, the interest rates on post office was too high. This would mean that you cannot reduce your lending rates, because deposit rates cannot be reduced.

The above move could help lending rates by banks to come down and hence push economic growth rates higher. Stock markets are likely to cheer the move, as it could channelize savings from post office into stock markets.

It would now be interesting to see, if banks cut their interest rates further in the coming days. The Reserve Bank of India is slated to hold a monetary policy meet later next month and it is widely expected that we may see an interest rate cut at the policy meet.

The decision to review the interest rates every quarter would also mean that we would see frequent changes in the interest rate of the schemes, than before.

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