There is some speculation that there could be a cut in interest rates on post office small savings schemes like PPF, NSC, Sukanya Samriddhi, Senior Citizens Savings Scheme, Kissan Vikas Patra and post office time deposits.
Reasons to conclude for a cut in interest rates
What is happening right now is that it is very difficult to keep bond yields low, the sovereign bond yields low and the government has some huge borrowing lined-up. The fiscal deficit of the government for 2021-22 has been projected at 6.8%, thanks to the cascading impact of Covid-19. This means the government has to borrow heavily and higher the costs at which it has to borrow, the pressure would show on the fiscal deficit.
Also, a lot of the government borrowings, can push bond yields higher. The worry right now is that unless interest rate on small savings comes down, it is difficult to push interest rates overall lower. Apart from this there is an anomaly between the interest rates being offered by banks and the post office. Take a look at the table below.
Quick comparison between small savings and bank deposits rates
|1-2 years||2-3 years||5 years and above|
|Post office time deposit||5.50%||5.50%||6.80%|
|Public Provident Fund||7.10%|
|Kissan Vikas Patra||6.90%|
|National Savings Certificate||6.80%|
|Senior Citizens Savings Scheme||7.40%|
Clearly, post office rates are better, which might prompt the government to reduce the interest rates. Apart from this lower interest rates on deposits would push lower rates on borrowings, which in turn could propel borrowings and hence the economy.
The government revises the interest rates on the different post office schemes every quarter. So, the next due date for revision is July 1, 2021. It's always difficult to predict what the authorities would do. However, investors have the time until July 1, to decide if they want to invest now on the hope that interest rates would fall.
We advise investors not to look for longer term tenure of instruments like 5 years and beyond. Invest for the shorter term and more like medium term. This is because if interest rates rise, which we believe it should, you would benefit.
Sunil Fernandes, the author of this article has spent 2 and half decades covering business and finance in India and abroad. Sunil has worked with frontline daily newspapers and investment magazines in India and abroad.