Experts expect 'no major hike' in small savings schemes' interest rates for October-December quarter

One major factor is the alignment of SCSS rates with long-term fixed deposits (FDs). This move, combined with the Reserve Bank of India's (RBI) decision to pause rate hikes, has left limited room for further upward adjustments, according to financial experts. Furthermore, a global decrease in inflation has contributed to this scenario.

In August 2023, India's retail inflation eased to 6.83 percent from 7.44 percent in July. While small savings scheme rates are not solely influenced by monthly figures, experts point out that the expectation is that inflation will remain high throughout the year, based on the recent policy announcement where RBI Governor Shaktikanta Das increased the CPI inflation forecast for FY24 from 5.1 percent to 5.4 percent.

Adhil Shetty, the CEO at BankBazaar, offered insights into the situation. He noted that many small savings schemes, including SCSS, were not adjusted to market conditions during the COVID-19 pandemic, resulting in rates significantly higher than market norms. However, rate hikes in the past year have brought these rates in line with long-term Fixed Deposits (FDs). He also highlighted that the RBI has paused rate hikes since April, and with global inflation slowly receding, the expectation is that the repo rate would remain unchanged.

In the case of the Public Provident Fund (PPF), its interest rates are inextricably tied to the yields of 10-year government securities in the secondary market. Adjustments in PPF rates are dictated by a formula based on the previous three-month average yield of relevant government securities with comparable maturity. The central government conducts a quarterly review, factoring in these yields.

According to Pankaj Kumar, a Partner at financial advisery firm Alpha Capital, the descent in the benchmark 10-year bond yield, which averaged 7.3 percent from March to May 2023, casts uncertainty on the possibility of a PPF rate hike, especially given the 25 basis-point decline.

For the current quarter that will end on Saturday, September 30, the Finance Ministry hiked the rates for select small savings instruments such as post office term deposits of one and two-year tenors and recurring deposits by 10-30 basis points. The interest rate spectrum for small savings schemes for the July to September quarter spans from 4 percent for savings deposits to 8.2 percent for the senior citizens' savings scheme.