The government has slashed the rates on the Public Provident Fund and post office time deposits to align them with market rates.
Accordingly with effect from April 1, 2016, the Public Provident Fund will attract an interest rate of 8.1 per cent as against 8.7 per cent currently, while the time deposit rate has been slashed dramatically to 7.1 per cent from 8.4 per cent, while the Kissan Vikas Patra has seen interest rates cut to 7.8 per cent from 8.7 per cent.
Now with the cut in interest rates banks could cut their own term deposit rates, which means that they could also cut lending rates, as and when required. This is expected to bolster lending and help propel economic growth rates.
With inflation hovering near the 5 per cent mark, the real rate of returns still works out a reasonable 2 per cent for banks.
In the past the Reserve Bank of India has cut interest rates by 125 basis points, but, banks have cut interest rates by a meagre 70 basis points on account of paying higher interest rates on fixed deposits.
The next month is likely to see the RBI credit policy, which may see a further cut in interest rate of 25 basis points.
It is not clear whether the KVP rates would be with immediate effect. If it is with effect from April 1, it still gives investors a good 10 days to invest at 8.7 per cent.
The cut in interest rates would not be good from the perspective of the common man and one would have to wait and see if there is a backlash.