Small Savings Schemes are designed to provide low risk and less volatility, they are attractive investment options for investors, and at the same time, it mobilises revenues for national development initiatives. Small savings interest rates are set by the government but have a lag in relation to market yields on G-secs. The Government reviews the interest rates on Small Savings Schemes every quarter considering the nation’s inflation and liquidity condition.
In my previous article, I have explained the rate hike that took place on March 31, 2023. The Government had increased interest rates on Small Savings Schemes by 10-70 basis points for April-June Q1 FY 2023-24.
These hikes in small savings rates for the first quarter of FY 2023-24 came while interest rates were on the rise and inflation was high. The RBI has since then maintained a pause in its interest rate cycle. In its June 08, 2023, monetary policy review, the RBI paused the Repo Rate for the second time since it started hiking the rate in May 2022 to combat rising inflation.
For the investors of Small Savings Schemes, the centre recently announced an increase in the interest rates for the second quarter of the current financial year.
Hike in Interest Rates on Small Savings Schemes for Q2 FY 2023-24:
The Government, on June 30, 2023, raised interest rates on select saving schemes by 10-30 basis points for the July-September quarter amid a pause in the interest rate cycle by the Reserve Bank of India (RBI) and a moderation in yields on government securities.
The small savings instruments on which interest rates have been hiked are the 1- and 2-year Post Office Time Deposits with a 10-basis-point increase for each and Post Office 5-year Recurring Deposit with an increase of 30-bps. The interest rates for all other Small Savings Schemes remain unchanged and offer the same interest rate as in the April-June 2023 quarter.
Here’s the list of revisions of interest rates on Small Savings Schemes for the July to September 2023 quarter:
|Small Savings Scheme Instrument
|Rate of Interest from
Jan – Mar
Q4 FY 2022-23
|Rate of Interest from
Apr – June
Q1 FY 2023-24
|Rate of Interest from
July – Sept
Q2 FY 2023-24
|Post Office 5-year Recurring Deposit
|Post Office Monthly Income Scheme
|Post Office Time Deposit (1 year)
|Post Office Time Deposit (2 years)
|Post Office Time Deposit (3 years)
|Post Office Time Deposit (5 years)
|Senior Citizens' Saving Scheme (SCSS)
|Sukanya Samriddhi Yojana (SSY)
|National Savings Certificate
|Public Provident Fund (PPF)
|Kisan Vikas Patra (KVP)
|7.2% (123 months)
|7.5% (115 months)
|7.5% (115 months)
(Source: DEA, Govt of India)
With this revision, the interest rates on these small savings schemes now range from 4% to 8.2%, which is the highest offered on Senior Citizens Savings Scheme (SCSS). The Post Office 1-year and 2-year Term Deposits will now earn 0.1% higher points at 6.9% and 7%, respectively (one basis point is one-hundredth of a percentage point).
Interest rates on popular schemes such as SCSS, National Savings Certificate, Kisan Vikas Patra, and Sukanya Samriddhi Account Scheme have been kept unchanged. However, the current interest rate hikes on select Small Savings Schemes are lower in comparison to the earlier quarter when the Government had announced an increase of up to 70 bps. The interest rate for the Public Provident Scheme remained unchanged for the 13th consecutive quarter.
According to the Government’s own methodology, when market yields on government securities rise or fall during the reference period, interest rates on Small Savings Schemes should move in the same direction.
After keeping small savings rates unchanged for nine consecutive quarters, the Centre in September 2022 increased the interest rates of these Small Savings Schemes by 10-30 bps for the October-December quarter in the last year. Further, the interest rates for Government-backed Small Savings Schemes like SCSS, NSC, Kisan Vikas Patra, PMIS, 1 year, 2 years, 3years and 5-years Post Office Term Deposit schemes were revised for the January-March quarter in 2023. Then in March-end this year, the Government again announced an increase in rates for the April-June quarter.
However, from March to May 2023, which is the reference period for small savings interest rates for the July-September quarter, the government bond yields fell sharply. The rates on 10-year bonds decreased by around 45 bps, while yields on 5-year bonds declined by about 50 bps. The government’s 364-day Treasury bills yield was also reduced by more than 30 basis points. Considering the government’s latest decision to retain interest rates on most Small Savings Schemes while making slight increases to a few would indicate that they are once again out of sync with formula-based rates due to the decline in yields in March-May 2023.
How Should Investors Approach the Hike in Interest Rates for Small Savings Schemes?
Since May 2022, the Reserve Bank of India (RBI) has started raising key rates. As a result, banks have been increasing interest rates on Fixed Deposits (FD), which is good news for FD investors who were sitting with decadal-low interest rates. A significant rise in the interest rate of Fixed Deposit Schemes, which is also considered a low-risk investment, offers strong competition to the Small Savings Schemes.
Although banks have endeavoured to increase FD interest rates, many Small Savings Schemes are still at par with the FDs. Apart from Fixed Deposits, even the interest rates on savings accounts offered by some of the large banks in the industry is lower than the interest rate on the Post Office Savings Account. For example, the Post Office Savings Account is currently offering 4% per annum, whereas State Bank of India (SBI) offers interest rates up to 2.75% p.a. on savings accounts, HDFC Bank and ICICI Bank offers 3-3.50% p.a.
However, the RBI has paused and kept rates unchanged during the past two policy meetings, which may be why many banks have slowed up on raising FD rates. Given that, FDs are backed by large banks. They are almost now at par with small savings schemes, but when we consider the sovereign backing on the schemes, attractive tax benefits, as well as focus on low risk and stable returns, investment in Small Savings Schemes at favourable rates could be a better option for investors. For investors like retirees and senior citizens, with the requirement for regular monthly fixed-income Small Savings Schemes could be a better alternative to FDs.
Investors should take these interest rate revisions for Small Savings Schemes seriously since they won’t be sustainable for long. Some of these Small Savings Schemes also offer tax advantages that may assist investors in reducing their taxable income.
Furthermore, keep in mind that despite the attractive interest rates and low risk that Small Savings Schemes offer, investors should avoid putting all their money into these schemes, as many schemes have poor liquidity due to long-term lock-in periods. One should consider the growing rate of inflation, which might cause your savings and fixed-income investments to lose some of its purchasing value. Since equities frequently outperform inflation over extended periods of time, investors may consider some exposure to equities via mutual funds, along with investments in Small Savings Schemes; this allocation could weather the risk of high inflation.
This article first appeared on PersonalFN here