Those who have invested in small savings schemes have heave a sigh of relief. Although the yield on dated Government Securities is seeing a downtrend, the Government has decided to keep the interest rate on small saving schemes such as National Saving Certificates (NSC) and Public Provident Fund (PPF) unchanged for three months starting Wednesday.

Not changing the rate is critical as it will help more money to be collected under small savings. This will in turn help the Government to borrow more from small savings funds. It also needs to be noted that last week, the Government had decided to extend the date for deposit in small savings and investment in life insurance policies etc. till July 31 to avail of tax benefit for FY 2019-20. No change in interest rate will encourage more people to opt for small savings.

NSC scores over term deposit

This decision has been taken after the Finance Ministry cut rates sharply on all instruments for three months period starting April 1 between 50 basis points and 140 basis points (100 basis points mean one percentage point). Despite this cut, the interest rate on five-year NSC is much higher than the five-year term deposit of State Bank of India. While government offers 6.8 per cent on NSC, the SBI gives 5.4 per cent (6.20 per cent in case of senior citizen) for term deposit of five years and up to 10 years.

In the last couple of months, banks have lowered interest rate on all types of term deposits and on the savings account. This has put pressure on the Government to cut rates on small saving, but it refused to relent this time. Banks say that small savings schemes are attractive because of the higher interest rates and tax benefits, and that hurts mobilisation of bank deposits. It also affects the transmission of policy rate cuts, which is why the RBI has also advocated rate rationalisation on small savings.

G-Sec yields on the decline

Yields on dated Government Securities (G-Secs) play an important role in rate revision. According to RBI data, the yield is continuously on the decline. For example, the return on 10-year G-Sec was 6.74 per cent on December 27 while it was a tad lower at 6.73 on March 27. However, it saw a steep fall in May, and as on June 12, it was at 5.81 per cent. This made a strong case for the downward revision in interest rates for small savings schemes, but the government preferred to keep them unchanged.

The small savings schemes basket comprises 12 instruments including the National Saving Certificate (NSC), Public Provident Fund (PPF), Kisan Vikas Patra (KVP) and Sukanya Samridihi Scheme. The government resets the interest rate at the beginning of every quarter. Theoretically, since 2016, interest rate resetting has been done based on yields of government securities of the corresponding maturity with some spread on the scheme for senior citizens, as advised by the Shyamala Gopinath Committee. However, in practice, the interest rate changes are made considering several other factors , including political ones.

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