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PPF, other small savings scheme interest rate could be hiked from July

Benefits of premature closure of small savings schemes would be introduced to deal with medical emergencies, and higher education needs among others, it said. Photo: iStockPremium
Benefits of premature closure of small savings schemes would be introduced to deal with medical emergencies, and higher education needs among others, it said. Photo: iStock

  • The Indian government decides interest rates on these savings schemes every 3 months of a year. The Centre will announce the new interest rates for the period of July - September 2022, by end of this month.

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In the current market scenario, equities are under bearish pressure with steep funds outflow, while gold is expensive and cryptocurrencies have crashed brutally. In these times, finding an investment pool that could fetch some risk-free guaranteed value returns on your hard-earned money, is like searching for a needle in a haystack. However, post office savings schemes are likely to be answers to many investors who are searching for a fixed return on their investments due to their nature of being linked with government bonds that are rising owing to strong demand in recent times.

The Indian government decides interest rates on these savings schemes every 3 months of a year. The Centre will announce the new interest rates for the period of July - September 2022, by end of this month. It is believed that interest rate of these schemes will be hiked due to rising g-secs. 

According to the World Government Bonds data, on Wednesday, India's 10-year government bonds yield stands at 7.460% which has risen by 99.9 basis points in six months and 11 basis points in 1 month. While the 5-year yield is at 7.269% increasing by 140.4 basis points in six months and 12.8 basis points in 1 month.

The 2-year and 3-year g-sec yields are at 6.603% and 7.005% rising by 163.3 basis points and 171 basis points in six months. While the jump is about 28.2 points and 14.8 basis points in one month.

The 1-year g-sec yield has climbed by a whopping 207.1 basis points in six months and is at 6.303%. In one month, this yield has soared 39.1 basis points.

For the shorter terms, 3-months and 6-month g-sec yields are at 5.090% and 5.770% increasing by 146 basis points and 184 basis points in six months.

For April 1 to June 30, 2022, the interest rate on the Post Office Savings account is 4%, while 1 to 3-year term deposits have an interest rate of 5.5% each. The 5-year term deposit rate is 6.7%, while the 5-year recurring deposit scheme rate is 5.8%.

Senior citizen savings scheme has an interest rate of 7.45, while the Monthly Income Account (MIS) interest rate is 6.6% and National Savings Certificate (NSC) interest rate is 6.8%.

Public provident fund scheme has an interest rate of 7.1%, on the other hand, the rate is 6.9% on Kisan Vikas Patra​​ and 7.6% on Sukanya Samriddhi Account Scheme​​.

Economists at ICRA in their latest report said, interest rates on various small savings schemes have not been changed for the last eight quarters since Q1 FY2021. Rates for the small savings schemes for Q2 FY2023 are set to be announced in end-June 2022.

According to the economists, the average month-end yields on G-Sec for one-year, two-year, and five-year bonds have increased substantially by 138 bps, 93 bps, and 79 bps, respectively, from Mar 2022- May 2022, following an increase of 38 bps, 31 bps, and 31 bps, respectively, during Dec 2021-Feb 2022.

Thereby, ICRA economists said, "we expect the interest rates on small savings schemes to be hiked for Q2 FY2023, given the sharp increases seen in the G-Sec yields of various maturities, to which such rates are linked. An increase in small savings rates could lead to higher flows into such schemes, limiting the need for additional market borrowings on account of the overshooting of fiscal deficit."

In March 2016, in line with Shyamala Gopinath Committee recommendations to ensure small savings schemes are market-linked, the Finance Ministry had announced instead of annual resetting of small savings schemes' interest rates for the next financial year, the interest rates from now on will be reset every quarter based on the G-Sec yields of the previous three months.

The Gopinath committee had recommended keeping small savings interest rates higher by 25-100 basis points from the average yields of government securities.

FinMin in 2016 had announced the additional interest rate spreads on small savings schemes like PPF, Senior Citizen Savings Scheme, Sukanya Samridhi Scheme, NSC, etc. The additional spread is 25 basis points for PPF, 100 basis points for Senior Citizen Savings Scheme, 75 basis points for Sukanya Samridhi Scheme, 25 basis points for five-year time deposit, and 25 basis points for National Savings Certificate, and 25 basis points for Monthly Income Scheme. These additional interest rate spreads are being continued.

Government Security (G-Sec) is a tradeable instrument issued by the central and state governments. The instrument represents the Government’s debt obligation. Notably, these securities are short-term ( referred to as treasury bills, with original maturities of less than one year) or long-term ( like Government bonds or dated securities with an original maturity of one year or more).

In India, the central government issues both treasury bills and bonds or dated securities while the state governments issue only bonds or dated securities, which are called the State Development Loans (SDLs). As per RBI FAQs, G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.

Another reason for the hike in government-owned small savings schemes could be because of banks hiking their fixed deposit interest rates amidst a repo rate hike scenario. To compete with bank FDs and make post office savings attractive for customers, the government may increase the interest rates on these schemes.

In the last two policies, RBI has hiked the policy repo rate by 90 basis points. The first hike was 40 basis points in May and the second of 50 basis points in June policy. Now policy repo rate is at 4.90%. There is more room for rate hikes as RBI focuses on taming the multi-year high inflation.

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