Govt raises interest rates on small savings

Govt raises interest rates on small savings

Interest on savings deposits, however, has been retained at 4% annually.

In a respite to common man, the government on Thursday hiked the interest rates on small savings schemes, including National Saving Certificate and Public Provident Fund for the October-December quarter.

After the revision, the interest rate for the five-year Senior Citizens Savings Scheme will be 8.7% instead of 8.3% now. The interest on the senior citizens' scheme is paid quarterly.

Interest on savings deposits, however, has been retained at 4% annually.
Public Provident Fund (PPF) and National Savings Certificate (NSC) will fetch annual interest rate of 8% in place of the existing 7.6% and Kisan Vikas Patra (KVP) will yield 7.7% and will now mature in 112 months instead of 118 earlier. KVP’s interest rate until now was 7.3%.

The girl child savings scheme Sukanya Samriddhi will offer 8.5% in place of 8.1%. Term deposits of 1-5 years will fetch interest rate of 6.9-7.8% while the five-year recurring deposit will pay an interest of 7.3% instead of 6.9%. 

This is the first increase in interest rates of small saving schemes since the quarterly review system of interest rates was implemented in April 2016 and rates were linked to benchmark government bonds.  

Two back to back hikes in the interest rates by RBI and the yields on the benchmark government bonds which have topped 8% might have moved the needle, according to experts. But a few even said that closer to elections, the government did not want to lose the middle class vote bank.

In the past two years the bond yields and interest rates rose on several occasions, but the rates on small savings were not revised upward. They declined more than 1% since 2016 leading to a decline in small savings receipts.

According to the latest RBI figures, there has been a secular decline in small savings since 2016-17.

The interest rates on National Saving Certificates which stood at 8.5% in April 2016, declined to 7.6% in September this year, that of Kisan Vikas Patra was down from 8.7% to 7.3% and the interest rates on PPF were down from 8.7% to 7.6% in the past two years.

Though the government changed the rules of the game in 2016 to ensure banks were able to reduce deposit rates and did not face unfair competition from small savings schemes, the move neither helped the government nor the monetary authority. The savings rate declined from a high of 36% prior to this decade to 30% now.

In the process, the government also alienated the urban middle class, a major vote bank for BJP.