Government Leaves Small Savings Rates Unchanged

Earlier this week, the Ministry of Finance notified the public that it would be leaving small savings rates untouched for the April to June quarter. Traditional investors who nurture a preference for investments into schemes such as PPF, NSC, KVP or the Sukanya Samriddhi Yojana, breathed a sigh of relief.

“The rates of interest on various small savings schemes for the first quarter of financial year 2018-19 staring 1^ April, 2018 shall remain unchanged from those notified for the fourth quarter of financial year 2017-18”, the notification said.

Since early 2016, the Ministry of Finance has been recalibrating rates on small savings schemes on a quarterly basis, something that had hitherto never been done.

Previously, the MoF had slashed rates across the board for all small savings schemes by 0.2%, for the JFM 2018 quarter – a move that received brickbats from risk-averse savers across the country. The only scheme for which rates were left untouched at 8.30% was the SCSS (Senior Citizen’s Savings Scheme).

Small Savings Scheme interest rates have witnessed a precipitous drop since 2013. PPF rates are down more than 1%, and even the Sukanya Samriddhi Yojana, launched amidst much fanfare with a supernormal 9.1% interest rate, offers just 8.1% now – 100 bps lower than its interest rate at its time of launch.

Presently, the PPF and NSC fetch investors 7.6% per annum, whereas the KVP (Kisan Vikas Patra), which was relaunched in 2014 after having been discontinued in 2011, offers an effective yield of 7.30%.

The fall in small savings interest rates over the past few years have coincided with a fall in key rates across the economy, such as the repo rate – which stands at just 6.25% now. Since we’re unlikely to see further reductions or increases in the repo rate for the remaining three quarters of 2018, its likely that small savings rates will not fluctuate a much through the year.

Even investors who have sworn a lifelong allegiance to government-led schemes may want to consider investing at least part of their low-risk savings into credit risk debt mutual funds at this time, as a number of them are commanding impressive yields to maturity. As always, they would be advised to understand the risks associated with Mutual Funds before they commit their capital to them.