The decision to reduce interest rates on small savings scheme has been prompted by surge in collections which was adding to the fiscal burden of the central government. According to estimates the collections have been of the order of Rs 34,000 crore against the budget estimate of Rs 21,640 crore.Following the decision, the rate on post office savings account will now be 4.5 per cent. The interest rates on post office time deposits for one, two, three and five years will be 9 per cent, 10 per cent, 11 per cent and 11.5 per cent respectively.

Similarly, the rate of interest on Post Office Recurring Deposits will be 11.5 per cent. The Post Office Monthly Account will now offer 12 per cent against 13 percent earlier. However, the earlier stipulation of 10 per cent bonus on maturity in this scheme will continue and also the 5 per cent discount on deposits in case of premature withdrawal before three years.The Kisan Vikas Patra and the Indira Vikas Parta will now double in six years instead of five and half years. This, according to an official announcement, was in keeping with trend of rates of interest offered by all India financial institutions on money multiplier bonds while discounting the rates on these government of India instruments on account of the complete security assured.

The National Savings Certificate - VIII issue will now offer an interest of 11.5 per cent. The pre-mature encashment values in respect of Kisan Vikas Patra have also been revised downwards correspondingly.

The rates of interest on the Deposit Scheme for Retired Government Employees and the Deposit Scheme for Retired PSU employees have been reduced to 9 per cent from 10 per cent.

The government has also decided to pass onthe benefit of the lower interest cost on small savings scheme to the states/UT governments. The rate of interest on loans advanced to state/UT governments against small savings collections will be reduced from 14.5 per cent to 14 per cent from January 1.In order to allow time to various post offices and banks to make necessary arrangements for effecting changes in interest rates, the government has suspended acceptance of deposits. These operations, the official announcement said, "will be resumed as early as possible in different parts of the country and in any case not later than January 18, 1999." The government also decided to reduce the interest rate on relief bonds from 10 per cent to 9 per cent with immediate effect. Consequent to this decision, the sale of bonds bearing interest rate of 10 per cent will cease.

It was also clarified that the date of issue of bonds will be the date of receipt of subscription in cash, date of tender of draft or the date of realisation of cheque. However, thoseinvestors who have already submitted valid applications for the 10 per cent relief bonds upto the date on which the receiving offices have actually received advice of the change in the rate of interest, will have the benefit of being issued 10 per cent bonds notwithstanding the date from which the revised rate applies.

The official announcement further pointed out that reduction of interest rates follows acceptance of one of the recommendations of a committee which went into various parameters of the collections under the small savings scheme, disbursement of loans to state governments and cost of small saving scheme.

The committee of experts, which was set up in November 1997, had submitted its report to the finance minister on September 7, 1998. The government on its part has in principle agreed with the thrust of the recommendations. One of the recommendations of th committee,which was accepted by the government, was to benchmark the rates of interests to the rates of similar instruments inbanks/financial institutions.