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Kolkata: Can small savings interest rates come down from July 1, 2025? This question is troubling millions of Indians — both at the lower end and middle of the financial pyramid — for the first time in a few years. The Centre revises the interest rates on small saving instruments once every three months. Therefore, the date scheduled for the finance ministry to reset the small savings interest rates is today. If there is any change, they will become effective from tomorrow July 1.

The small savings instruments were designed for the common people to deposit their hard-earned savings with sovereign guarantee of the safety of funds. While the risk-averse individuals of the country invest a huge amount of their hard-earned money into these instruments, a lot of those who invest in market instruments such as equities and mutual funds, also park some of their funds in the small savings instruments since a number of personal finance advisers recommend them for stable interest income in their portfolio.

Why is the change required at all

One significant point to note is that small savings interest rates don’t exist in a vacuum. Eventually all rates are pegged — directly or indirectly — to the key policy rates set by the Reserve Bank of India MPC (Monetary Policy Committee). A panel headed by Shyamala Gopinath, which was set up in July 2010, recommended that small savings interest rates be linked to the market. The committee said that yields of central government bond in the secondary market yields can serve as a benchmark to peg the interest rates of small savings. In fact, the recommendation was to add 25 basis points to the yield.

Let’s see how the interest rate for a popular instrument comes down if the current yields of 10 year government bonds are applied. Let’s take PPF (public provident fund) for example. The average yield of 10-year G-sec between March 24, 2025, and June 24, 2025, is 6.325%. If one adds 0.25 percentage points (or 25 basis points) to this figure, the new interest rate in PPF comes down to 6.575% instead of the 7.1% paid in PPF. However, it must also be kept in mind that the recommendations are not binding on the government and if Nirmala Sitharaman wants, she could reset the rates above those dictated by the formula or retain the rates at current level.

Aggressive Repo Rate cut by RBI

The fall in yield of government bonds is linked to the Repo Rate, that RBI has slashed by a big 100 basis points from 6.5% in early February to 5.5% in early June. In three cats of rate cuts, the Repo Rate was brought down quickly, the key objective was to bring down the cost of funds in the economy. The government hoped that as a direct result, consumption will improve, which, in turn, will push GDP growth rates up, which will trigger employment and private investment.

The cut in rates immediately triggered banks and NBFCs slashing interest rates on all sorts of loans. But they also brought down the interest rates on fixed deposits. It could well be the turn of the small savings today.