Small Savings Schemes To Fetch Sharply Lower Interest Rate From January

Interest rate on GOI-backed small saving schemes including Public Provident Fund (PPF), post office time deposits, Senior Citizens Savings Scheme, National Savings Certificate (NSC) are revised every quarter in line with the yield on benchmark 10-year government bonds. And this time around when the rates come up for revision, investors may see a sharp cut in interest rate beginning January.

Notably, as per a Times of India report, the Reserve Bank of India has nudged the government to reduce interest rates on these schemes such that banks in tandem can reduce interest rate on fixed deposits as well as loan, and enable improved transmission of RBI's key policy rate.

In view of the country's ailing economic growth and controlled inflation level, RBI since February 2019 has cut repo rate by 135 bps to 5.15% currently but interest rate on small savings schemes have seen a reduction of just 10 bps. 1 basis point is one-hundredth of a percentage point. Also, banks during the period have slashed interest rate on term deposits by an average of 50 bps and if they further head on to cut rates, term deposit investors at the bank may move their funds to small saving schemes seeking still better returns.

Though the issue has been raised several times in the past, the government had been reluctant in taking any step in the direction, fearing backlash from investors primarily senior citizens who had already been complaining of falling income due to decline in FD rates.

Nonetheless, if the government continues with high rates on these saving schemes it will be able to mop up a substantial amount, thereby reducing the need for further market borrowings. Already for the current financial year, the government is widely expected to breach the fiscal deficit target.

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