In fact, the RBI has asked the government top cut rates on small savings schemes like the PPF (Public Provident Fund), post office deposits etc. The purpose of this request is something slightly larger. Most of the small savings deposit rates are regulated by the government and is set from time to time to ensure that small savers are able to get a good return on these investments. RBI’s contention has been that since the deposits like PPF offer higher returns than bank FDs, pay tax-free interest and also offer tax exemptions under Section 80C of the Income Tax Act, their actual yield is much higher. This distorts the yield curve as a result of which banks are not able to cut the rates on deposits beyond a point.

Now, unless the deposit rate cut, the loan rates cannot be cut and that is why the transmission of rate cuts is not happening in bank loans. RBI has cut repo rates by 135 bps since January 2019 but bank lending rates have gone down by less than 35 bps. According to the RBI, this can be addressed if the rates on post office deposits and other small savings are also cut in tandem. This will ensure that banks are able to reduce their cost of deposits without losing out to post offices and can also lend at lower rates to corporates. This could mean that the government may look at a sharp cut in small savings rate post January 2020.