There could be some relief in store for investors in small savings schemes. The interest rate on small savings schemes, like the popular Public Provident Fund (PPF), is expected to be revised higher, in line with a rise in bond yields. The government at the month-end will decide on the interest rate for the next quarter (July-September).
The interest rate on PPF has been kept unchanged since January at 7.6%. Interest rates on small savings schemes like post office deposits, National Savings Certificate (NSC), Kisan Vikas Patra (KVP) and Senior Citizens Savings Scheme are linked to government bond yields of similar maturities. A small mark-up is added to the average government bond yield of the previous quarter.
However, this formula for fixing small savings rates, as recommended by Shyamala Gopinath committee, has however not been strictly followed in some quarters. Since April 2016, interest rates on small saving schemes are being revised on a quarterly basis.
Bond yields have been rising since last year on concerns over rising oil prices, fiscal deficit and inflation outlook. Earlier this month, the 10-year bond yield rose above 8% for the first time since May 2015.
The 10-year bond yield is currently hovering around the 7.9% mark.
“The rates on small savings are linked to the movement in government securities rates. However,the government has not been very particular in revising the rates based on the secondary market yield movements. The rates have increased quite sharply over the last six months and as the government did not revise the small savings rates for April-June quarter, there is a greater likelihood that they may marginally increase the rates on the small savings for the September quarter,” says Karthik Srinivasan, group head of Financial Sector Ratings at rating agency ICRA.
The Reserve Bank of India (RBI) recently raised its repo rate by 25 basis points to 6.25%, its first hike in over four years, amid inflation concerns. One basis point is one-hundredth of a percentage point.
Even before the central bank hiked interest rates, many banks revised their deposit rates higher. For example, India’s biggest bank SBI last month hiked interest rate on fixed deposits of some select maturities.
“Small saving rates are likely to go up as they are benchmarked with yields on government bonds and a hike would also be necessary to align with other savings options like bank deposits,” says Madan Sabnavis, chief economist at CARE Ratings.
Financial planners say even if the interest rate on PPF is not hiked, it still remains an good investment option. “The present 7.6% interest rate is reasonably a good rate considering the fact that the interest is tax free. So the real rate of return is high for investors compared to the bank fixed deposits, where interest is taxable,” says K. Ramalingam, the chief financial planner at Holistic Investment Planners.