Small savings schemes – an island in an ocean of rising rates

Expectations were high, and probably rightly so, that the Ministry of Finance would announce a hike in the small savings scheme (SSS) interest rates. With the central bank finally hiking repo rate to 4.9%, and yields on G-Sec or government securities also surging on inflation and other concerns, SSS rates too were expected to follow suit.

But the rates on these schemes, which are reviewed every quarter, were left unchanged, once again, for the July-September, 2022 quarter. These rate revisions were announced on 30 June.

Small savings schemes include many popular schemes such as the Post Office time deposits, the Public Provident Fund (PPF), the Senior Citizen Savings Scheme (SCSS) and the National Savings Certificate (NSC), among others.

Deposit rates rising

Ever since the Reserve Bank of India hiked the repo rate, many banks and NBFCs have undertaken deposit rate increases. Many of them have announced even more than one hike in the course of the last two months. 

Data from BankBazaar shows that many public sector banks and private sector banks have hiked rates on less than one-year deposit rates by 10-75 bps and 20-100 bps, respectively between April 1 and June 24. Several public and private sector banks have hiked the rates for their 1- to 2-year deposits by 15-35 bps and 10-75 bps, respectively and for 2- to 3-year deposits, by 15-35 bps and 20-50 bps, respectively.

NBFCs such as Bajaj Finance, Shriram Transport Finance and HDFC too have hiked their deposit rates in recent times. Bajaj Finance, for example, has hiked interest rates thrice since May.

Impacted by rising inflation concerns, bond yields too have been heading northwards. The benchmark 10-year G-Sec yield has risen by over 100 bps to around 7.4% year-to-date.

On the other hand, interest rates on the SSS have remained static since the last cut on 31 March 2020. The 1-,2- and 3-year Post Office time deposits offer 5.5% and the 5-year time deposits offer 6.7%. The SCSS, which comes with a five-year lock-in, offers 7.4%.

As bank and NBFC deposit rates inch up further, the SSS may start looking less attractive on returns. These schemes may, though, still hold investor interest because of the tax benefits enjoyed by some of them (such as PPF and SCSS) and their high degree of safety given their sovereign backing.

Then and now

Small savings schemes have been an attractive investment option in the past when interest rates were declining. This was because, despite the rates on SSS becoming market-linked (linked to G-Sec yields of similar tenure) from April 2016, these were not pared despite the repo rate cuts by the RBI and the fall in G-sec yields during that period.

Today, with the interest rate upcycle having begun, it is likely that the revision in SSS rates may not keep up pace with the rising rates. They may move up, but possibly, only with a lag.