If you are a risk-averse investor and have been banking on small savings schemes for the purpose of saving and investment as well as building your retirement nest egg, then there is some bad news for you. For, the government has reduced the return on small savings schemes – including Public Provident Fund (PPF), NSC, Kisan Vikas Patra and Senior Citizen Savings Scheme — by 10 basis points. Following these reductions, the interest rate on PPF is now 7.8 per cent, 5-year Senior Citizen Savings Scheme 8.3 per cent, Kisan Vikas Patra 8.5 per cent and NSC 7.8 per cent.
It may be noted that the small saving schemes interest rates, which are linked to the benchmark 10-year government bond yields, are now reset every quarter. The last revision in rates came in the month of March, when the rates for such schemes had been reduced by 10 basis points. Although these rate cuts are not good for small savers and senior citizens, however financial experts say that the reduction will help banks bring down the lending rates which is good for the industry. Also, this signals the government’s resolve to keep lowering cost of capital in our economy and is certainly a welcome move.
“Interest rates on several small saving instruments were cut by the Government of India on Friday. Although the cut may not be significant in real terms, yet it signals continuation of interest rates softening cycle. Politically any significant softening of interest rates is a difficult proposition as depositors lose money and hence any such announcement is usually accompanied by protests and demand for roll back. These incremental, small cuts, however, are a good strategy of achieving the overall objective of lower interest rates and cushioning the impact on depositors and thereby preventing any political backlash,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
According to him, the continuous lowering of interest rates is a big positive for business and economic development. High cost of capital has always been a competitive disadvantage for the Indian industry. “Therefore, this move should be welcomed by business and industry,” he says.
From the stock market and mutual funds point of view also, this is a move in the right direction as lower deposit rates will encourage investors to divert their funds towards mutual funds and shares.