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The hike in interest rates on small savings schemes would help the government collect higher amounts from the National Small Savings Fund (NSSF) and may also help reduce it's market borrowing for the second half of FY19, according to a report.

The government on Thursday raised interest rates on small savings schemes, including NSC and PPF, by up to 0.4 percent for the October-December quarter. Interest rates for small savings schemes are notified on a quarterly basis.

"We expect small savings schemes to provide an attractive alternative to bank deposits in the coming months, which should help the government to avail a higher net amount from the NSSF, compared to its target of Rs 1 trillion in FY19," rating agency Icra said in a report.

This may result in the government announcing a market borrowing programme for the second half of FY19, which may be smaller than what has been expected so far by the markets, it said.

In March this year, the government had indicated that it would borrow a net amount of Rs 1 trillion from the NSSF to fund its fiscal deficit in FY19, up from the budgeted amount of Rs 0.75 trillion, and reduce government bond issuance by an equivalent amount.

For the current financial year, the government had indicated its plans to borrow Rs 4.07 lakh crore from the market. In the first half, it plans to borrow Rs 2.88 lakh crore from market.

The government increased the interest rate for the five-year term deposit, recurring deposit and Senior Citizens Savings Scheme to 7.8, 7.3 and 8.7 percent, respectively.

The report said the Reserve Bank would likely increase repo rate by 25 basis points in the October policy due to looming inflation risks, the robust GDP growth print for first quarter of FY19 and the continued weakening of the rupee.

"This is likely to be accompanied by a change in stance to withdrawal of accommodation, to signal another potential rate hike in the December 2018 policy review, unless inflation risks recede appreciably during the third quarter of FY19," the report said.

It said the systemic liquidity in the banking system is expected to tighten in the second half of FY19, on account of the upcoming harvest, festive and marriage season, state elections and busy season for credit.

While this would nudge banks to increase deposit rates in the third quarter of the current financial year, the extent of the same would lag the overall increase in the repo rate and the magnitude of the recent revision in small saving rates, the report said.