New Delhi: When the choppy stock markets turned consumers to safer fixed-income products last year, India’s multiple post office saving schemes did not gain popularity as was anticipated. But financial planners say post office schemes may turn attractive if banks’ interest rates continue to fall.
Post office saving schemes include fixed deposits, recurring deposits, public provident fund (PPF), Kisan Vikas Patra and National Savings Certificate (NSC).
Cash-starved banks raised their one-year deposit rates to 10.5% in September last year, as against 8% return offered by post office saving schemes. However, bank deposit rates have since come down to 6.5-8.25% for one-year deposits.
Saving grace: Financial planners say post office savings schemes could turn attractive if the interest rates offered by banks continue to fall. Harikrishna Katragadda / Mint
A senior official in the department of posts said the total outstanding balance in post office savings schemes actually registered a fall, coming down to Rs5.5 trillion in the year ended March from Rs5.64 trillion the previous year.
“There has been a decline because people are shifting from postal savings to other instruments, which have better returns. Also, because of an increase in investment options under section 80C of the Income-tax Act, people have got more choices,” the official said, requesting anonymity as he is not authorized to speak with media.
Section 80C of the Income-tax Act, 1961, offers deductions in respect of certain payments in computing the total income of an assessee.
Bank deposits in 2008-09 stood at Rs39.52 trillion, compared with Rs32.97 trillion a year ago.
But bankers say the rate of interest offered by post office schemes should be brought down. “Administered rates distort the market. It forces money to flow from banks... Then banks can’t get deposits at lower rates and, therefore, can’t lend at lower rates,” said Hemant Kaul, executive director, Axis Bank Ltd. “Post office should decide (interest) rates depending on the cost to other players in the market. But that situation is far off. The issue needs to be addressed immediately.”
NSC, among the most popular post office schemes, offers an interest rate of 8% per annum, which is compounded half-yearly. The effective interest, which is a taxable income, comes to 8.16% per annum. PPF, too, gives an interest of 8% per annum, but it is compounded annually and is tax-free. In both the schemes, interest accumulates and is not paid out every year.
“Post office savings have gone down because the bank interest rates were pretty good in the last two years compared with post office schemes,” said Surya Bhatia, a New-Delhi based financial planner. “Investment in post office schemes may, however, go up if rate cuts happen further. Currently, both are offering around 8%.”
Some economists expect the soft rate regime to continue till the second half of fiscal 2011. In a research noted dated 1 June, Bank of America Securities-Merrill Lynch economist Indranil Sen Gupta pointed out that the gap between the 10-year bond yield and the prime lending rate of banks, at about 550 basis points, is too high to sustain and should come down. “This should protect our soft lending rate regime until second half of FY11,” Sen Gupta said in his report.
“Higher interest rates offered by banks and better returns from income funds over last two years caused a decline in post office schemes. Going forward, if interest rates fall further, we might see an increase in postal savings. We have to see how things pan out in the next six months,” said Gaurav Mashruwala, a Mumbai-based financial planner. “Given that post office schemes have sovereign guarantee and do not fluctuate with the market conditions, they are good avenues to invest in.”
Himanshu Kohli, a founder partner of Client Associates, a Gurgaon-based wealth management company, said that in 2008 people preferred to hold cash instead of making long-term investments. Since post office investments are binding, people didn’t go to post offices, he said.
But he said this year may be different.
“We may expect half to 1% fall in interest rates over 12 months. With 2-3% real rate of interest and (section) 80C benefits, post office savings offer a long-term hedge to beat inflation and provides safety, too.”