More Stories

Informist, Wednesday, Jan. 7, 2026

 

By Krity Ambey

 

NEW DELHI – As the Reserve Bank of India's cumulative repo rate cuts since February filter in through the banking system, the government's small savings schemes have emerged as a preferred deposit option for households. At the current pace, net inflows into these schemes may exceed the Budget estimate for 2025-26 (Apr-Mar), data shows.

 

While banks have cut deposit rates since the RBI began its easing cycle in February, the government has kept interest rates on small savings schemes unchanged for nearly two years. Small savings schemes currently offer returns of up to 8.2%, compared with a weighted average domestic term deposit rate of 6.05% on fresh rupee deposits at public sector banks. 

 

In Oct-Dec, interest rates on small savings instruments were 27-144 basis points higher than what they should have been as per the market-linked formula. The RBI reduced the repo rate by 25 basis points in December, taking the cumulative rate cut since February to 125 bps. However, the government left rates on small savings schemes unchanged for the eighth consecutive quarter for Jan-Mar.

 

The RBI's October monetary policy report warned that a widening gap between small savings rates and their formula-based benchmarks could impede the transmission of policy rate changes to bank deposit rates, particularly during an easing cycle. A large interest rate differential in favour of small savings could trigger a migration of deposits away from banks, the report had said.

 

Small savings collections in Apr-Nov rose 25.5% on year to INR 1.98 trillion, accounting for 65% of the Budget estimate of INR 3.06 trillion. At the current pace, collections could exceed the full year's Budget target by around INR 1.2 trillion. Notably, the Budget estimate for small savings mop-up this year is 9.8% lower than actual collections in FY25.

 

Tax incentives under the old tax regime – allowing deductions of up to INR 150,000 on investments in small savings schemes – also tend to drive a surge in inflows toward the end of the fiscal year. Over the last six years, collections in Apr-Nov have accounted for 46–54% of the annual small savings mop-up. If this pattern holds, inflows for the year could reach INR 4.30 trillion, against the Budget estimate of INR 3.06 trillion.

 

Small savings collections play a crucial role in financing the government's fiscal deficit, alongside net market borrowings and drawdowns from cash balances. In FY23, a shortfall in small savings receipts forced the government to tap INR 487 billion from ways and means advances. The FY26 Budget has projected net borrowing of INR 3.43 trillion from small savings to finance the fiscal deficit, down from INR 1.62 trillion last year.

 

With the market borrowing programme unchanged for the second half of FY26, stronger small savings inflows are likely to provide the government with a comfortable cash buffer. This could prove helpful if the fiscal deficit exceeds the Budget estimate of INR 15.69 trillion and may give the government greater flexibility to reject unfavourable bids at upcoming government securities auctions.

 

The government could also deploy surplus cash from small savings collections to buy back older debt – a practice that resumed in FY25 after a six-year gap. In FY25, the government saved INR 50 billion in interest payments by buying back INR 882 billion worth of gilts. So far this year, it has already bought back gilts worth INR 872 billion.

 

Meanwhile, small savings schemes are likely to remain attractive at least until the next interest rate hike cycle. Historically, rates on these schemes have rarely been adjusted during periods of falling interest rates. The government had announced a sharp cut to small savings rates in March 2021, but reversed the decision within a day amid widespread criticism.  End

 

Edited by Avishek Dutta

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

 

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd. by NSE Data & Analytics Ltd., a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt. Ltd.

 

Informist Media Tel +91 (22) 6985-4000

Send comments to feedback@informistmedia.com

 

© Informist Media Pvt. Ltd. 2026. All rights reserved.