PPF, NSC, other small savings schemes may see further reduction in interest rate

Small savings schemes such as PPF and NSC are likely to see further reduction in interest rate. New rates for the three months period starting July 1 are to be made public by next week.

Any rate reduction with effect from July 1 means fresh deposits made will earn less while deposit made on or before June 30 will continue to get the existing rate.

If rates are revised downwards, it will be the second successive time it is being done. On March 31, rates were cut sharply on all instruments, barring saving deposits, between 50 basis points and 140 basis points (100 basis points mean one percentage point). Despite this cut, interest rate on 5-year NSC is much higher than 5-year term deposit of State Bank of India. While government offers 6.8 per cent on NSC, the SBI gives 5.4 per cent (6.20 per cent in case of senior citizen) for term deposit of 5 years and up to 10 years.

In the last couple of months, banks have lowered interest rate on all types of term deposits and also on savings account. This has put pressure on the government to cut rates on small savings. Banks say that small savings schemes are attractive because of higher interest rates and tax benefits, and that hurts mobilisation of bank deposits. It also affects the transmission of policy rate cuts, which is why the RBI has also advocated rate rationalisation on small savings.

Government officials say the present situation poses a dilemma for policy makers. One the one hand, lower interest rate means lesser income for savers, especially senior citizens, while on the other hand it will encourage people to spend more and create demand. “A delicate balance is required, especially when people are planning to save more to secure the future during this pandemic,” an official said.

Yields on dated Government Securities (G-Sec) play an important role in rate revision. According to RBI data, yield is continuously on the decline. For example, yield on 10-year G-Sec was 6.74 per cent on December 27 while it was a tad lower at 6.73 on March 27. However, it saw a steep fall in May and as on June 12, it was at 5.81 per cent. This makes a strong case for downward revision in interest rates for small savings schemes.

The small savings schemes basket comprises 12 instruments including the National Saving Certificate (NSC), Public Provident Fund (PPF), Kisan Vikas Patra (KVP) and Sukanya Samridihi Scheme. The government resets the interest rate in the beginning of every quarter. Theoretically, since 2016, interest rate re-setting has been done on the basis of yields of government securities of corresponding maturity with some spread on the scheme for senior citizens, as advised by the Shyamala Gopinath Committee. However, in practice, the interest rate changes are made taking several other factors into consideration, including political ones.