PPF to fetch 7.1%, NSC 6.8% as govt slashes small savings schemes interest rates

The government on 31 March 2020 announced a steep cut in the interest rates on small savings schemes for the first quarter (April to June) of FY 2020-21. Interest rates on various small savings schemes have been cut by between 70 basis points and 140 basis points (100 basis points = 1 per cent).

For instance, interest rates on Public Provident Fund (PPF) and Sukanya Samriddhi Yojana have been cut by 0.8% or 80 bps, each. Post office time deposits (of certain tenors) have seen the sharpest cut of 1.4 per cent or 140 bps. After the latest reduction, PPF will earn 7.1 per cent (down from 7.9 per cent), Sukanya Samriddhi Yojana 7.6 per cent (8.4 per cent), and time deposits will earn 5.5-6.7 per cent for the April-June quarter.

Here is a look how much each small savings scheme will earn for the quarter ending June 30, 2020.

% change in Small Savings schemes interest rates
Source: Ministry of Finance website

More bad news for fixed income investors
Interest rates on small savings schemes (except for post office savings account) were last revised in July 2019 - rates were cut by 10 basis points (100 bps = 1 percentage point). Since then, interest rates have been kept unchanged. The Economic Survey had earlier suggested that the interest rates on the small savings schemes be reduced to bring them in consonance with the interest rates prevailing in the economy.

The latest rate reduction in small savings schemes does not bode well for fixed income investors, especially for senior citizens who are dependent on interest as a major source of regular income. This is because over the past one year, banks have also been reducing interest rates on fixed deposit (FDs). According to a Times of India report, State Bank of India's (SBI) one-year fixed deposit is fetching less than 6 per cent for the first time since August 2004. After the Reserve Bank of India (RBI) cut the repo rate by 75 bps on March 27, 2020, SBI, slashed its FD rates the same evening by up to 50 bps. After the cut, SBI's one-year FD will earn 5.2 per cent (senior citizens will earn 6.2 per cent).

How interest rates are set on small savings schemes
The interest rates on small savings schemes are reviewed every quarter by the government. The formula to arrive at the interest rates of the small savings schemes was given by the Shyamala Gopinath Committee. The committee had suggested that the interest rates of different schemes should be 25-100 bps higher than the yields of the government bonds of similar maturity.

Small savings scheme interest rate
Source: Finance Ministry circular dated March 31, 2020