With government bond yields going up, interest rates of small savings schemes could also go up soon as they are set for review by the end of this month. The small savings schemes include Public Provident Fund Account (PPF), Sukanya Samriddhi Accounts (SCA), Senior Citizen Savings Scheme (SCSS), National Savings Certificates (NSC) among others. These schemes are also known as post office schemes
Why the interest rate of PPF, Sukanya Samriddhi, Senior Citizens’ Savings Scheme could increase soon?
The benchmark 10-year bond yield has consistently remained over 7 per cent, since April 2022. It has averaged 7.31 per cent in June to August 2022, according to the data by the investing.com.
Going by the formula notified by the Ministry of Finance earlier via a press release dated March 18, 2016, PPF interest could climb up to 7.56 per cent in the upcoming quarter. (Average three-month yield from G-Sec+25 basis points). At present, PPF earns 7.1 per cent interest rate.
Similarly, interest rate of Sukanya Samriddhi Scheme could jump up to 8.3 per cent soon from the existing 7.6 per cent interest rate. (Average three-month yield from G-Sec+75 basis points). Also, small savings interest rates are set for a review by the end of this month.
However, it needs to be mentioned that the government does not always immediately adjust small savings rates as per the formula. Often there is a substantial lag.
Interest rates of the small savings schemes were last revised downwards in the April-June 2020 quarter. Since then, the interest rates have remained unchanged till September 2022. However, a significant rise in government yield in the recent months could prompt a hike in the interest rate of small savings schemes in the near future.
How are interest rates of PPF, Sukanya Samriddhi Accounts, other small savings scheme calculated?
The interest rates of small savings schemes are aligned with the yields of the government securities (G-sec) of similar maturity, according to the earlier mentioned press release by the Finance Ministry. The Union government reviews the interest rate of small savings schemes every quarter based on the G-Sec yields of the previous three months, according to the mentioned release by the Finance Ministry. This is in line with the recommendations of the Shyamala Gopinath Committee, 2011 to ensure that the interest rates of small savings schemes are market-linked.
The interest rates of the small savings schemes are linked to market yields on G-secs with a lag and are reviewed, fixed on a quarterly basis at a spread ranging from 0-100 basis points over (100 basis points = 1 per cent) and above G-Sec yields of comparable maturities, according to the Reserve Bank of India (RBI).
The formulae were recommended by the Shyamala Gopinath Committee in 2011. As per the formula notified by the Finance Ministry in 2016, PPF has a spread of 25 basis points, Sukanya Samriddhi Yojana has spread of 75 basis points and Senior Citizens Savings scheme has a spread of 100 basis points. The panel suggested an annual revision, but the government had decided to review rates every quarter since April 2016.
It must be mentioned that the set formula is not always being followed. There have been several instances in the past when the Union government did not revise rates of PPF, Sukanya Samriddhi and other small savings schemes even after a change in the G-Sec yields.
The interest rates for the small savings schemes are due for review on September 30. The rates applicable for the October-December quarter of FY2022-23 will be the ones post the review and will change only if revised else the existing rates would continue. The interest rate for the small savings schemes for third quarter of FY 2022-23 are expected to be announced around September 30. It will be interesting to see whether the Union government will follow Gopinath formula to determine the interest rates this time.
Source By: economictimes