New Delhi, Aug. 3: The government today notified a senior citizen’s savings scheme to be sold through post offices that will offer a 9 per cent interest payout even as inflation, which soared to 6.52 per cent last week, threatened to cross 7 per cent because of steep fuel and steel price hikes.

The 9 per cent payout, which is about 3 per cent higher than normal long-term bank deposit rates, translates into a real income of just 2.5 per cent, after taking into account current inflation.

Real interest rates, calculated by deducting inflation rate from the nominal interest rates, are supposed to be the benchmark for encouraging depositors to save.

If inflation crosses 7 per cent — which is likely given the steel and fuel price hikes that will have a cascading effect on the economy — the real income from the bond will drop to below 2 per cent.

However, the finance ministry today came out with statements of comfort. The ministry promised to batten down the hatches on the price rise to keep average annual inflation around 5 per cent.

Finance minister P. Chidambaram put up a brave front and told reporters: “I have no control over global fuel prices... but we will take all steps necessary to keep inflation under control.”

Real-interest income from bank deposits is already negative. A three-year-plus deposit with the State Bank of India fetches nominal interest of 5.25 per cent, which means the depositor is earning a negative income of 1.25 per cent at the current inflation rate.

The new scheme follows strident criticism of the low interest-rate regime by pensioners and others with fixed incomes.

The new scheme promises the higher rate to citizens of 60 years and above or those who have retired under a voluntary retirement scheme and are at least 55 years old. Deposits have to be in multiples of Rs 1,000, subject to a maximum of Rs 15 lakh.

Both the Centre and the RBI have been pushing for a low interest regime as they believe this will help Indian industry grow faster. By lowering deposit rates — which have come down by nearly half over the last five years — Indian banks have been able to lower lending rates by about half.

Industry chambers have been crying themselves hoarse seeking ever lower rates of interest, citing the global example. However, globally, low interest rates are coupled with a low inflation rate. Most prudent central banks index interest rates to inflation rates.

The negative earnings from bank deposits and the havoc this can wreak on the country’s savings rate and, in turn, on the economic growth are already a cause for concern for the Planning Commission.

The panel has long been pressing to link inflation rate with interest payouts, arguing that the only way the country can achieve a targeted 7-8 per cent GDP growth is to push savings up to almost 30 per cent from the current 24.

This, the commission has been saying, is possible only if the savings rate is pushed up. The commission had in working group meetings on savings said that falling interest rates are likely to act as a disincentive to savings and some method has to be worked out to protect savings by the household sector from inflation.