The Centre on Friday raised interest rates on most small savings schemes by 10-70 basis points (bps) for April-June 2023, with the sharpest 70 bps increase for the National Savings Certificate (NSC), reflecting transmission of policy rate hikes by Reserve Bank of India (RBI).
After a gap of 11 quarters, the interest rate on Sukanya Samriddhi Account Scheme for the girl child was also raised by 40 bps to 8%.
However, the rate for the other popular tax-free scheme Public Provident Fund (PPF) was kept at 7.1%, unchanged for 12 quarters in a row. FE had reported recently that the PPF rate may remain unchanged, given the high tax-free returns from the scheme. At the current interest rate of 7.1% for PPF, the effective interest rate works out to be 10.32% if an individual is in the tax bracket of 31.2%.
Also Read: Why you should still invest in Public Provident Fund (PPF)
The rate revisions assume importance, given that India’s gross domestic savings has fallen over the years from a high of 36.9% of GDP in 2010-11 to an estimated 30.2% in 2021-22 and may be 28.5% in 2022-23, according to analysts. The fall in saving rate could have adverse implications for the drive to kick-start a new investment cycle.
The rate was raised sharply by 70 bps for NSC to 7.7%, followed by 50 bps on 5-year time deposits. Similarly, the rate was raised by 30 bps each for Kisan Vikas Patra (with maturity after 120 months) to 7.5% and Monthly Income Account Scheme to 7.4%. The rate hike on other time deposits and senior citizens was between 10 bps to 20 bps.
With the rate revision, the interest rate offered by the small savings schemes is much higher than comparable rates offered by State Bank of India (SBI) for term deposits of various maturities (6.5-7%).
For the March quarter, the government had raised interest rates by 110 basis points on time deposits for one year, two years and three years to 6.6%, 6.8% and 6.9%, respectively. The rate has been raised by 30 basis points on time deposits for five years to 7%. The rates on the senior citizen savings scheme and the monthly income account scheme were raised by 40 basis points to 8% and 7.1%, respectively. The rate on KVP was raised by 20 bps to 7.2% (with maturity after 120 months).
Also read: Post Office Monthly Income Scheme, Recurring Deposit Interest Rates Revised
The Centre has increased its reliance on the National Small Savings Fund (NSSF) to finance a part of its FY24 fiscal deficit. The government has budgeted its offtake from the NSSF to rise from Rs 4.39 trillion in the FY23 revised estimate to Rs 4.71 trillion in FY24.
Several factors determine the interest rates that apply to small savings schemes, including recommendations of the Shyamala Gopinath Committee, the existence of taxation benefits for small investors and resultant rates of return, interest, cost, etc. The Gopinath Committee had recommended that the interest rates of various NSSF schemes be 25-100 basis points higher than the yields of similar maturity government bonds.
