Small savings schemes are popular investment avenues where still majority of Indians, especially senior citizens, prefer to save. Recently, the government announced a hike in small savings interest rates by 10 bps to 30 bps for October-December quarter. However, the same was done only for for 2-year and 3-year time deposits, senior citizens savings scheme and Kisan Vikas Patra. Rates for other schemes like Sukanya Samriddhi Yojana (SSY), Public Provident Fund (PPF), and National Savings Certificate (NSC) remained unchanged.
This comes at a time when inflation is hovering at 7 percent and bond yields are fetching around 7.4 percent return. The low interest rates resulted in negative real rate of returns for small investors. Also, in light of rising government bond yields, the most recent interest rate increase was anticipated.
On the other hand, in order to control inflation, the Reserve Bank of India (RBI) raised the repo rate by 0.5 percent to 5.9 percent during its monetary policy meeting on September 30. This was the fourth repo rate hike in five months in a sequence of increases.
So, if rates are rising, why the same has not been done for PPF, NSC and SSY?
Experts say that PPF and SSY rates are tied to long-term trends, while the repo rate is on the low end of the debt range. So,
PPF rates did not mirror the repo rate when it went down.
According to Abhinav Angirish, Founder at Investonline.in, the government is increasing repo rate while maintaining status quo on interest rates of small savings scheme in order to balance out the increasing interest burden.
"Small savings rates are recalculated every three months and are correlated with yields on bonds with the same maturity. The yields on bonds continued their downward trend during the course of 2020 and 21. Now that bond yields have skyrocketed, some small savings rates have been adjusted to a higher percentage," he said.
"It must be noted that in March 2020, in an effort to provide respite to people from lockdown, RBI actually decreased its benchmark repo rate by 75 basis points to 4.40 percent. During that time, the government did not reduce interest rates for small savings plans to safeguard the interests of depositors, especially pensioners," he said.
Three-year post office time deposit interest rates have climbed by 30 basis points to 5.8 percent, while two-year post office time deposit interest rates have grown by 20 basis points to 5.7 percent. The PPF and the Sukanya Samriddhi Yojana, among others, will continue to offer the same low interest rates.
Are there any chances of rate increase in near future?
The rates would go up only in a very limited manner, if at all, despite the hikes, said Adhil Shetty, CEO at BankBazaar.com
So, should one continue investing in PPF or SSYS?
As per Angirish, the need for active management of the portfolio arises from the fact that virtually all financial instruments are now market-linked.
"Any decline in G-Sec Yields will result in decline of interest rates. Investors can still profit from it by investing a portion of their money in long-term Gilt Mutual funds. Bond prices increase as interest rates decrease and vice versa because of this inverse relationship between the two. The idea is to create an unrelated, varied portfolio so that the ability to achieve financial goals is not limited by the loss of one instrument. If investors are regularly investing in PPF or Sukanya Samriddhi Yojna, they should consider investing in long-term debt funds as an alternative," he told CNBC-TV18.com.
In the same way, if individuals are investing in a National Savings Certificate or a bank fixed deposit, they may also want to consider debt mutual funds portfolio with the same maturity.
