• Move aims to better transmit interest-rate cuts to economy
  • Decision removes plans' spread over government securities

India pledged to regularly review and align the returns on some small savings programs with that of government securities to hasten the transmission of interest-rate cuts in Asia’s third-largest economy.

The government will remove a 25 basis-point spread some of the plans have over the market rate of sovereign debt instruments to bring them closer to what banks offer, the Finance Ministry said in an e-mailed statement on Tuesday.

“The small savings interest rates are perceived to limit the banking sector’s ability to lower deposit rates in response to the monetary policy of the Reserve Bank of India,” the ministry said. The changes aim to make the plans “market-oriented in the interest of overall economic growth of the country, even while protecting their social objectives and promoting long-term savings,” it said.

The move is a nod to a long-standing complaint by banks, which have come under fire for not passing on more of last year’s 125 basis-points of rate cuts to customers. The changes will take place April 1, when a new methodology that banks were asked to adopt in setting a key lending rate also comes into force.

The review will take place quarterly, the government said, though not all programs are affected by the new policy. A senior-citizen plan and long-term instruments including the Public Provident Fund were among those spared.

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