The interest rate on small savings schemes like Public Provident Fund (PPF) and other small savings schemes like Senior Citizen Savings Scheme and Sukanya Samriddhi Yojana may be poised for further cuts in subsequent quarters, say experts. The bond markets have reacted positively to the Budget proposals and yields have softened to over one-year lows. Small savings rates are pegged to government bond yields and for the latest July-September quarter, the government had earlier lowered interest rates on PPF and other post office savings schemes by 10 basis points.
"Some part of borrowings within the gross borrowings is estimated to be raised overseas. So the pressure on domestic liquidity is that much less. Bias remains for softer yields this quarter," says RK Gurumurthy, head of treasury at Lakshmi Vilas Bank.
Sanjiv Bhasin, executive vice president of IIFL Securities, expects a paradigm shift in yields over the next few years. “Now be prepared for yields below 5% as government gets aggressive on overseas borrowing. The cost of deposit has to fall as lending rates will come down," he says, adding that small savings rates are also expected to trend lower amid softening bond yields.
In a note Kotak Institutional Equities said that bond yields have come down sharply but bank deposit and lending rates have hardly budged due to "inadequate transmission of the RBI’s recent repo rate cuts as the government’s borrowings through the small savings route have acted as a floor to bank deposits."
After the revision of interest rates for the July-September quarter of the ongoing financial year, PPF and National Savings Certificate (NSC) will yield 7.9% annual interest from the earlier 8%. KVP will fetch 7.6% with maturity of 113 months as compared, as compared to 7.7% with maturity of 112 months earlier. The girl child savings scheme Sukanya Samriddhi account will fetch a lower rate of 8.4% as compared with 8.5%. The five-year Senior Citizens Savings Scheme fetches a lower rate of interest of 8.6%, from 8.7% earlier.
The RBI has already cut benchmark rates thrice by cumulative 75 basis points since the start of this year. And now the Budget opens up more room for further rate cuts from the central bank, say analysts.
“Except the excise duty/cess hike on petrol/diesel, there are no measures in the Union Budget 2019-20 affecting inflationary pressures in the economy. Therefore, we continue believing that the reasonable headline fiscal targets and very comfortable inflation will allow the RBI to cut policy rates by 25-50 basis points in the remaining months of FY20," domestic brokerage Motilal Oswal says in a note.