INSUBCONTINENT EXCLUSIVE:
Interest rates on most small savings schemes have remained unchanged for three consecutive quartersTop banks such as State Bank of India
(SBI), HDFC Bank and Punjab National Bank have raised their interest rates on fixed deposit or FD
That means better return on investment (RoI) for the customer depositing money in a bank FD
Interest rates on government-run small savings schemes, however, remain the same
Interest rates for small savings schemes - such as Public Provident Fund (PPF) and Senior Citizen Savings Scheme (SCSS) - for the quarter
ending September 2018 have been kept unchanged
In other words, the return on your investment in any of the small savings scheme is not moving higher.TheIndianSubcontinent here analyses
some of the factors that impact small savings schemes interest rates:But first, what are small savings schemesSmall saving schemes are
broadly categorised into three categories: 1) postal deposits, which include savings account, recurring and fixed deposits of varying
maturities, and monthly income scheme (MIS); 2) savings certificates, which include national savings certificate (NSC) and Kisan Vikas Patra
(KVP); and 3) social security schemes such as PPF and SCSS.Usually, small savings schemes offer a good alternative to bank savings
The return on small savings schemes tends to be higher than that on bank deposits of comparable maturities.These schemes provide an
alternative avenue to savings in banks.The return, or the interest rate, on small savings schemes is decided by the government for every
quarter on the basis of its bond yields.In the current scenario, bond yields are rising, which is why lenders like SBI and HDFC Bank have
hiked their FD interest rates.SBI currently pays an interest rate of 6.85 per cent on an FD of five-year maturity; investment in PPF or NSC
fetches an annual return of 7.6 per cent; the interest rate on KVP is fixed at 7.3 per cent, whereas SCSS yields a return of 8.3 per
cent.However, interest rates on most of these small savings schemes have not changed for three consecutive quarters
For the January-March quarter, the interest rate on small savings schemes was cut by 20 basis points while that on SCSS kept unchanged at
8.3 per cent.The Shyamala Gopinath committee suggested a formula for fixing the interest rate that is a small mark up on the average of bond
yield (similar maturity) of the previous quarter
Since April 2016, the interest rate on saving schemes is being notified on a quarterly basis
It has been recommended to revise the rates on a quarterly basis however the same has not been followed strictly.Why has the government not
raised interest rates on small savings schemesAccording to experts, the government is adopting a wait-and-watch policy
"Ideally, they (government) would not like to change the rates as frequently as market change, which is more real time
There is a a wait-and-watch approach to see if G-Sec yields would remain elevated for a longer period of time," said Madan Sabnavis, chief
economist at CARE Ratings.The RBI has raised repo rate - the key interest rate at which it lends short-term funds to commercial banks - to
6.5 per cent in two back-to-back bi-monthly policy reviews
These hikes come after a gap of five years
The total increase of 50 basis points in repo rate leads to a rise in the bond yields and, thus, expectations of higher interest rates on
small saving schemes."Investors have been eagerly expecting some rise in the interest rate of small saving schemes post the rise the bond
yields on back of rise in crude oil prices, less demand from PSU banks, concerns of fiscal deficit and inflation
The Finance ministry has not risen the interest rates in FY2018-19
However, with a 50 bps rate hike in the current fiscal year, we believe that the rates of small saving schemes should also inch upwards,"
said Abhimanyu Sofat, head of research, IIFL Securities.Where does your investment in small savings schemes goGovernment pools all your
investments in small savings schemes in the National Small Savings Fund
The NSSF money is used by the government to finance its fiscal deficit.According to a report by credit rating agency ICRA last month, the
government had in March this year indicated that it would borrow Rs
1 lakh crore from the NSSF to fund its fiscal deficit in FY2019, up from the budgeted amount of Rs 75,000 crore, and reduce G-Sec issuance
by an equivalent amount.ICRA further said in its report, citing provisional data from the Controller General of Accounts (CGA) for the first
two months of fiscal year 2019, that inflows into savings deposits and certificates, and PPF, aggregated to Rs 27,150 crore in April-May
2018, equivalent to 19.4 per cent of the budgeted amount
That was a substantial 42.8 per cent higher than the inflows in April-May 2017, the agency noted.Based on that, ICRA said that it expected
the government to meet its targeted borrowings from the NSSF in fiscal year 2019.But will you get higher returns on your investments in
sharp upward trend in the near term
However, small savings schemes interest rates are not likely to go down further from the current levels, as the rates have declined about 1
per cent over a couple of years in the recent past," said a spokesperson for ESAF Small Finance Bank.
