June 16, 2024


Delighting finance buffs

Govt cuts interest cut on PPF, other small savings schemes: What it means for you

The Covid-19 situation has impacted millions of livelihoods in India, forcing the government and central bank to take drastic measures to provide relief. But the 75 basis point interest rate cut, announced by Reserve Bank of India (RBI), will result in much lower interest income for millions who invest in such small savings schemes.

Following the RBI’s slashing of repo rate, the government has announced sharp interest rate cuts for small savings schemes for the first quarter (April-June) of 2020-21.

Starting today, interest rates on popular small savings schemes like Public Provident Fund (PPF), National Savings Certificate (NSC), Kisan Vikas Patra (KVP) and others will earn lower interest during the period.

While the interest rate on savings deposit was kept unchanged at 4 per cent, it was reduced by 80 basis point for the popular PPF scheme to 7.1 per cent. The interest fetched on PPF in the previous quarter was 7.9 per cent.

It is worth noting that the government reviews the interest rate on small savings scheme every quarter based on bond yields.

Moving on, the interest rate on five-year NSC has been lowered to 6.8 per cent against 7.9 per cent earlier. KVP stands at 6.9 per cent against earlier 7.6 per cent.

Meanwhile, the Sukanya Samriddhi Scheme interest rate has dipped to 7.4 per cent from previous 8.4 per cent a 100 basis point or 1 per cent interest rate cut.

The interest rates on five senior citizen savings scheme have also been reduced significantly by 120 basis points to 7.4 per cent from 8.6 per cent earlier.

Additionally, the five-year monthly income scheme will also fetch less at 6.6 per cent, down 100 basis points from 7.6 per cent rate offered on it earlier. Interest rates on term deposits ranging from 1 to 5 years will also be lower at 5.5-6.7 per cent.

Interest rate on the five-year recurring deposit scheme has now fallen to 5.8 per cent from the previous 7.2 per cent a 140 basis point or 1.4 per cent drop.

What it means for you

This is bad news for those investing in these small savings schemes, especially senior citizens who are invested in fixed income schemes.

Fixed-income investors, which include a large number of senior citizens, will now earn a lower rate of interest. That the development comes during the novel coronavirus outbreak makes matters worse for senior citizens who will see a drop in their regular income.

Some of these smalls savings schemes are widely availed by people across the country and they now may have to revisit their entire investment plan as they will now fetch much lower returns.

However, experts say that the current situation may have accelerated the rate of interest reduction in such small savings schemes, but added that a reduction was in line with market rates.

DEA Secretary Atanu Chakraborty had hinted a revision of popular smalls savings schemes in February. He told news agency PTI that it would lead to speedier transmission of the monetary policy rate.

“In India, right now we have about Rs 12 lakh crore in small savings schemes and roughly Rs 114 lakh crore in bank deposits. So the liability side of banks is getting affected by Rs 12 lakh crore. When banks say this, it seems a bit of a tail wagging the dog situation,” Chakroborty had told the news agency.

In light of the recent interest rate cuts, experts have recommended investors in small savings schemes to diversify their portfolio and look at hybrid or balanced funds, which offer more than one type of investment security.

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