It certainly doesn’t help the cause of these schemes that there are close substitutes available to postal deposits in the form of bank deposits. Both offer similar associated risks and rewards. Keeping the present situation in mind, with a high inflation, and a higher deposit rate expected, the chances that interest on small savings will go up are very remote. They are administered rates which are fixed by the government. This is the main difference between them and the bank deposits, because banks are free to price their deposit rates. Anytime, a bank can hike its deposit rate, which would instantly attract many consumers. A recent statistic shows that banks have been busy in the deposits sector, having hiked their rates by over 300 bps since 2004.

However, in the same period, returns on small savings have remained almost stable at 8%. That was still digestible till inflation hit India. Despite the returns differential between banks and small savings schemes, the real returns were still positive for investors in small savings schemes. However, after inflation crossed the 8%-mark in mid-May, the real returns became negative.

The small savings scheme is administered by the central government and the proceeds are used to finance fund requirements of state governments. However, this was proving costly for states until last year or so, as borrowing directly from the market was cheaper.