Post office term deposits have become competitive with bank fixed deposits (FDs) once again, thanks to three consecutive increases in interest rates on small savings schemes by the Indian government. The return on post office term deposits of two years under the small savings schemes is now 6.9%, the same as offered by most banks on deposits of similar maturity.
The Reserve Bank of India (RBI) has been increasing repo rates since May 2022, and the transmission to retail deposit rates has picked up pace in the second half (H2) of the last fiscal. This is after remaining subdued in the April-September (H1) period as banks focused on mobilizing bulk deposits. In H2, however, the increase in fresh retail deposit rates (122 bps) outpaced that in fresh bulk deposit rates (77 bps), as banks intensified their efforts to garner retail deposits to fund credit growth.
The weighted average domestic term deposit rate (WADTDR) on fresh deposits (including retail and bulk) of banks increased by 222 basis points (bps) from May 2022 to February. The transmission to WADTDR on outstanding deposits is also picking up, albeit gradually, reflecting the longer maturity profile of term deposits contracted at fixed rates, according to the RBI.
Meanwhile, the government has increased the interest rates on small savings instruments (SSIs) for the October-December quarter of 2022-23 by 10-30 bps, for the January-March quarter of 2022-23 by 20-110 bps, and for the first quarter of the current fiscal by 10-70 bps. This follows nine consecutive quarters of unchanged interest rates on SSIs, from the second quarter of 2020-21 to the second quarter of 2022-23.
Overall, these increases in interest rates on small savings schemes have made post office term deposits competitive with bank FDs once again. This is good news for savers who may have been looking for alternative investment options with higher returns. It remains to be seen how banks will respond to this development and whether they will adjust their rates to match those of post office term deposits.