Small savings schemes interest rates Jan-Mar 2017 kept unchanged

Recently interest rates have come down after demonetization, as supply of funds in the system has increased an people are expecting a central bank rate cut. Major banks  have cut FD rates. However the Government has left interest rates on small savings schemes unchanged increasing their attractiveness for those looking for safe places to park their money.

A table of of how interest rates on these schemes have evolved since April 1 2016 when they were first linked to G-sec yields on a quarterly basis. Over this period interest rates have been falling due to central bank rates cuts. As a result interest rates on small saving schemes have also been coming down albeit slowly.

Implications for your investments

The fact that interest rates on these schemes have not come down even as banks have cut FD rates now makes these schemes more attractive for those looking to park their money in guaranteed return, safe investments.

However  a few things need to be kept in mind:

1. While the rates offered on Post Office Schemes, Senior Citizen Savings Scheme and National Savings Certificate can be locked today for the entire tenure of these schemes. In the case of PPF and Sukanya Samriddhi Yojana will keep getting revised. Hence if interest rates in the economy keep going down, then rates on these two schemes will also eventually be revised lower. However, given the popularity of these schemes among retail investors we can with some safety assume, that the set rates will remain above market rates.

2. While the returns are guaranteed, they are not very high – probably just about sufficient to beat inflation but not by much. Hence investors cannot rely on these instruments to build wealth. Also the lock-in periods for some of the most attractive schemes are quite high: PPF -15years, Sukanya Samriddhi – 21 years etc.
Investors who think that interest rates will come down can do better with debt funds over a shorter horizon. Investors who are willing to commit funds for long periods, say 7+ years can expect higher returns from equity funds.

For a full list of how you can invest your money (for different risk/return preferences) with FD rates coming down, read: Top 10 investment ideas to beat low FD rates

Background on how interest rates on small saving schemes are set

Effective from April 1 2016, the Government had linked the interest rates on various small savings scheme to market interest rates. Small Savings schemes include the likes of Public Provident Fund, Sukanya Samriddhi Scheme, Senior Citizen Savings Scheme, National Savings Certificate, Post Office Monthly Income Scheme etc. This was done according to the recommendations of the Shyamala Gopinath Committee to ensure that banks are able to change their interest rates in line with the current market rates. The thought is that if  thereby enabling them to pass on central bank rate cuts, as and when they happen, effectively to borrowers.

As a result instead of being reset every year, interest rates on these schemes were to be revised every quarter based on Government bond yields (on comparable maturity) over the previous 3 months. This formula allowed for a certain spread or markup over G-sec yields: The markup for PPF, National Savings Certificate, Monthly Income Scheme and 5yr time deposit was 0.25%, for Sukanya Samriddhi Scheme it was 0.75% and 1% for Senior Citizen Savings Scheme. What this meant was that if the applicable G-sec yield over a certain period was adjudged to be 8%, then interest rate on PPF would be 8.25% .