Interest rate on small savings unchanged

Rates on other savings, PPF likely to be cut further

In a relief to the common man hit by demonetisation, the government on Monday left the interest rate on small savings unchanged for the January-March quarter despite the steepest drop in bond yields.

The government has linked the interest rates of small savings schemes to yields on its securities, and a decline in yields means interest rates of the PPF and other small savings schemes would be cut further.

In a notification, the finance ministry said investments in the public provident fund (PPF) and the five-year National Savings Certificate will continue to fetch an annual interest rate of 8%. It said Kisan Vikas Patra will fetch 7.7% and mature in 112 months.

Other schemes such as Sukanya Samriddhi and five-year senior citizen savings schemes will continue to fetch 8.5% interest as set in October.

Sources said a savings deposit will fetch 4% interest and term deposits of 1-5 years will offer 7-7.8% that will be paid quarterly. The five-year recurring deposit will continue to earn 7.3% interest.

“On the basis of the decision of the government, interest rates for small savings schemes are to be notified on a quarterly basis,” the ministry said while notifying the interest rates for the fourth quarter of 2016-17 starting from January 1, 2017, and ending on March 31.
Prior to this, the interest rates were reduced for small savings in October last year.

Interest rates on small savings are revised every three months. In the October-to- December quarter, the rate on PPF, for example, was cut to 8% from 8.1% in the July-September period.

Fall in yields
In all, the interest rate on PPF has been cut by 70 basis points from the beginning of the fiscal 2016-17, as the yields continued to fall.

The benchmark 10-year yield dropped 127 basis points in 2016, the most in eight years. Two factors that drove yields on the government’s bonds lower were the Reserve Bank of India’s bond purchases to improve money supply in the banking system and, demonetisation, which pumped money into banks causing yields to drop.