With the hike in interest rates, saving instruments like PPF and NSC are now slated to fetch higher returns. However, is this hike good enough and how will this benefit investors?
The Central Government has, after a long time, increased the rates of returns on various small savings schemes by 0.3% to 0.4% for the quarter starting October 1, 2018. With this, savings instruments like PPF and NSC – which had started losing their sheen for some time now in the wake of falling returns – are now slated to fetch higher returns. However, is this hike good enough and how will this benefit investors?
According to financial experts, the increase in the interest rates on small savings schemes is a welcome step and has come as a boost to the common man. However, it should have come a bit earlier.
“The increase in the interest rates on saving schemes by the government is happening later than sooner as the interest rates should have been increased in line with the increase in the yield on government securities, which has been going up for quite some time. The interest rates on saving scheme are supposed to be linked with the yield on government securities, but the government held back the increase in the rates for the two previous quarters. The government, therefore, had no choice but to attempt to align the savings schemes interest with the yield on government securities,” says Balwant Jain, a tax and investment expert.
Jimeet Modi, Founder & CEO, Samco Securities & StockNote, also believes that the rate hike is insufficient as 10-year government bond yields have increased by 100 bps over the last six months. “Although this is a welcome step, but this being the election year, the government should have opened the tap a little wider in the interest of small investors,” he says.
Whatever be the case, Jain believes that the increase in the saving interest rates will crowd out banks as they are starved of funds and they will also have to increase the rates on their fixed deposits to attract funds. This will result in the MCLR of banks go up immediately. Banks may also increase their lending rates to borrowers, including corporates. Moreover, the increased interest cost will discourage private investment in the capital asset, which may impact the growth of the country.
Here is the summarised table of the revised rates of interest on various small savings schemes for FY 2018-19:
Interest Rates (Q1/ Q2 of 2018-19)
Interest Rates (Q3 of 2018-19)
Savings Deposit (SD)
1 Year Time Deposit (TD)
2 Year Time Deposit (TD)
3 Year Time Deposit (TD)
5 Year Time Deposit (TD)
5 Year Recurring Deposit (RD)
5 Year Senior Citizens Savings Scheme (SCSS)
Quarterly and Paid
5 year Monthly Income Scheme (MIS)
Monthly and Paid
5 Year National Savings Certificate (NSC)
Public Provident Fund (PPF) Scheme
Kisan Vikas Patra (KVP)
Sukanya Samriddhi Account Scheme (SSAS)
* will mature in 118 months | ** will mature in 112 months
Impact on common man and senior citizens
However, this move will definitely benefit the common man. “The increase in the small savings rates and the consequent increase in bank fixed deposit rates may benefit the individual tax payers as well as senior citizens. The relief will be more prominent for senior citizens as they invest their retirement money generally in bank fixed deposits and senior citizen schemes. This may, however, be a psychological benefit only as the real rate of interest may not rise in line with the increase in the nominal rate of interest,” says Jain.
Naveen Kukreja, CEO & Co-founder of Paisabazaar.com, is also of the view that the interest rate hike on Small Savings Schemes (SSS) will benefit risk-averse fixed income investors, especially senior citizens. “The 30-40 bps hike in interest rates will increase their attractiveness vis-a-vis bank fixed deposit rates. The rate hike may also increase upside pressure on the rates offered by bank fixed deposits and other fixed income products,” he observes.
What should investors do?
Financial experts are of the view that senior citizens can consider Senior Citizens Savings Scheme (SCSS) for generating regular income as its quarterly compounded return of 8.7% p.a. now outstrips the highest FD rates offered by almost all banks. It may be noted that banks usually offer interest rates in the range of 5.75% to 8.25% approximately.
Risk-averse investors wishing to open Post Office Time Deposits, however, should compare interest rates offered on bank FDs as many banks offer significantly higher interest rate on FDs opened for up to 3 years’ tenure.
So far as investors with moderate to high-risk appetite having an investment horizon of more than 5 years are concerned, “they should still prefer equity mutual funds over small savings schemes. Equity as an asset class beats fixed income instruments, including small savings schemes, by a wide margin over the long term,” advises Kukreja.