The government may reduce the rates on small savings schemes by 50-75 basis points from the current rate of 8 percent in near future.

The move may be taken considering the nature of small saving schemes due to which these attract depositors and hence, tend to compete with the bank deposits products. It is said that the government is planning to set up a committee chaired by the former governor of RBI to study the issue and suggest appropriate steps regarding the same.

Quoting a federal official on the same," With this important measure, deeper cuts in lending rates can be expected."

Earlier, in the year 2003, the government reduced the interest rate on the small saving schemes by 100 basis points to 8 percent. Interest paid on these schemes and savings plans are tax free and compete with bank deposits.

It is reasoned, if banks reduce the deposit rates beyond a certain limit, as money will be diverted into the small savings schemes. Analysts point this as a major reason why the banks are refraining from reduction in the deposit rates.

Some industry experts point that with the declining rates of deposits, the lending rates might not lower much.

The major small saving schemes include postal term deposits, National Saving Certificates, Public Provident Fund offers 7-8 percent rates and tax benefits under Section 80 C of the Income Tax Act.