“At the end of every quarter, the Finance Ministry announces the interest rates on small savings for the next one. This routine exercise has, however, created quite an uproar since Wednesday, which was the last day of the March quarter and also the last day of fiscal year 2020-21. The ministry first announced a steep cut in savings rate across government schemes for the June quarter (April-June 2021) and then withdrew the circular within hours. The cut had come after at least three consecutive quarters of keeping rates unchanged. This morning, FM Nirmala Sitharaman termed the circular put out by the Department of Economic Affairs (DEA) under her ministry as an u201coversightu201d but offered no explanation for the release and subsequent withdrawal of the circular. u201cInterest rates of small savings schemes of GoI shall continue to be at the rates which existed in the last quarter of 2020-2021, ie, rates that prevailed as of March 2021. Orders issued by oversight shall be withdrawn.u201d. This of course led to a flood of memes on social media, as the word u201coversightu201d saw some play by enterprising Twitterati. Former Finance Minister and till recently a BJP veteran, Yashwant Sinha, spoke about rollbacks while lampooning Sitharaman. u201cI am very sad today. I thought I alone had the monopoly of roll backs. This govt has outdone even me. Labour laws, small savings interest rates are a couple of examples. Roll Back Modi.u201d. Sinha was, of course, referring to the much-talked-about rollback of fertiliser subsidy cut he had announced during his term as FM, after which he came to be known as the u201cRollback Sinhau201d. Meanwhile, some social media users even wondered if the tweet by Sitharaman, withdrawing the rate cuts, was her idea of a Foolu2019s Day joke. Only, the joke has already been played on the aam aadmi, the common man, for years now. As interest rates on small savings u2013 the money retirees usually park in schemes such as public provident fund (PPF), their own bank accounts, fixed deposit schemes or senior citizen savings schemes u2013 has been fetching diminishing returns since 2015-16, the second year of the Modi government. Another former Finance Minister, P Chidambaram, tweeted that notifying interest rates for the upcoming quarter was routine exercise by the DEA. u201cThe BJP government had decided to launch another assault on the middle class by slashing the interest rates and profiting itself. When caught, the FM is putting forward the lame excuse of u201cinadvertent erroru201d. He also said that u201cWhen inflation is at about 6 per cent and expected to rise, the BJP government is offering interest rates below 6 percent hitting the savers and the middle class below the beltu201d. At first glance, a comparison of the prevailing interest rates when the Modi government first came to power and the present state of affairs shows how the small savers have progressively suffered. On March 31, 2015, the Department of Economic Affairs had notified the interest rates on small savings schemes for the June quarter of that year. Bank deposits were fetchi9ng 4% annual rate of interest (versus 3.5% proposed by the Finance Ministry for the June quarter of 2021); three year time deposits were fetching 8.4% versus 4.4-5.1% proposed in the latest circular; and five-year time deposits were fetching a handsome return of 8.5% versus just 5.8% proposed for the current quarter. So does this mean the small savers are now much worse off than they were during the UPA regime, when interest rates on small savings schemes were much higher? D K Srivastava, Chief Policy Advisor at EY India, does not agree. u201cFor small savers, when we look at interest rates adjusted for inflation, there is not much difference between, say, 2015-16 and now, because inflation rate has fallen on a trend basis.u201d. What Srivastava is saying is this: interest rates for savings schemes are linked to overall demand for investments and supply of savings. In other words, interest rates are dependent on the available investible resources in the economy and when the resources are relatively more compared to the demand for them, then interest rates are driven down. There are two terms related to how much one earns on savings – nominal and real interest rates. Nominal interest rates are what one actually earns on savings. When theseu00a0are adjusted for inflation, then they are called real interest rates. In 2015-16, the rate of inflation was u201chighu201d or at least much higher than the rate presently and therefore the real interest rates were low. Now, because of the present monetary policy framework and inflation targeting mechanism, the inflation rate has been driven down and therefore nominal interest rates are also being driven down. In effect, Srivastava says the aam aadmi is not much worse than in 2015-16! So what should the retirees or people who have small sums for investment do? Well, perhaps investing in the stock markets through Mutual Funds will fetch better returns than parking money in bank fixed deposits. u201cSmall savings instruments are not very attractive avenues for saving so most people are already moving into MFs for better returns, particularly for longer horizons. This is desirable from the viewpoint of the development of the economy because investment made in equities is accessed by the private corporate sector, which may use it in productive activities,u201d Srivastava says. The bottomline is that instead of parking all one’s money in FDs or other small savings schemes, some surplus should be diverted to equities. #NirmalaSitharaman #MutualFunds #TaxSavings #PPFu00a0.”