Interest rates of small savings schemes for the October-December quarter are to be announced soon
Interest rates of various small savings schemes — Public Provident Fund (PPF), Senior Citizen Savings Scheme (SCSS), National Savings Certificate (NSC), Sukanya Samriddhi Yojana (SSY), Post Office Monthly Income Scheme (POMIS) — are due for a revision at the end of this month. Usually, the central government announces the interest rates of post office schemes by September 30, 2024.
Will the interest rate of PPF, Senior Citizen Savings Scheme, and Sukanya Samriddhi Yojana go up in October-December, 2024?
Interest rates of small savings schemes, be it PPF, Senior Citizen Savings Scheme or Sukanya Samriddhi Account are linked to yields of the 10-year Government Securities in the secondary market. There are set formulae for mark-ups over the average yield of relevant G-Secs of comparable maturities during three months before each quarter. Interest rates of the small saving schemes are reviewed every quarter based on the average G-Sec yield of the last three months.
Going by the formula notified by the Ministry of Finance in 2016, PPF has a spread of 25 basis points (bps) over the benchmark yield.
The average 10-year bond yield from June to August is 6.93%. According to the formula, the interest rate of PPF will be 25 bps higher than the average 10-year G-Sec yield of the corresponding maturity. So, the interest rate PPF should be 7.18% for the October to December quarter of 2024.
As the PPF rate is already at 7.1%, it is unlikely that the government will increase it for the next quarter.
Interest rates of most of the small savings schemes are already in line with the formula suggested by the Shyamala Gopinath Committee, 2011. So rate hike for the small savings schemes is not on the cards for the December quarter.
Will the interest rate of PPF, Senior Citizen Savings Scheme, and Sukanya Samriddhi Account be reduced during October-December quarter?
The next question is whether the government will start reducing the rates of the small savings schemes. The question of bringing down the rates arises as the rates have been at their peak for an extended period and the recent rate cut by the United States Federal Reserve. Only the interest rate of PPF remained unchanged since the April-June quarter of 2020. During the same period, the central government raised the interest rates of the most small savings instruments from 40 bps to 150 bps. A recent 50 bps rate cut by the United States Federal Reserve creates curiosity amongst investors whether the Reserve Bank of India (RBI) will follow the same route in its next monetary policy. “We are indeed towards the end of the rate hike cycle. However, the softening cycle has not yet kicked off,” says Nirav R Karkera, Head-Research, Fisdom.
“In fact, the central bank has expressed its intent to rely on domestic cues, like inflation, heavily before easing the rate regime. While global counterparts have already started the easing, we clearly seem to be in no hurry to follow suit; neither in terms of policy rates and consequently not for small savings schemes as well,” he adds.
When will the interest rate of small savings schemes start to reduce?
When can you expect a rate cut in the small savings scheme? Answering this, Nirav R Karkera, Head-Research, Fisdom says, “With the Reserve Bank of India (RBI) maintaining the status quo on interest rates in recent meetings, the government is expected to take a cautious approach when revising rates for small savings schemes. Given that we are nearing the end of the rate hike cycle, it is unlikely that the government will drastically reduce interest rates in the short term, especially since small savings rates have remained stable or seen marginal increases over the past few quarters.”
However, the interest rates are going to go down in the coming six months to one year, adds S. Sridharan, Founder and CEO, of Wallet Wealth LLP. The US Federal Reserve has already started reducing the interest rate and set the indication of the interest rate downward cycle. This signals that the central bank will also start reducing interest rates in the long-term and eventually the interest rates of small savings schemes will go down, adds Sridharan.
Strategy PPF, SCSS, SSY, NSC, other small scheme investors should follow now
For investors, the strategy should be to continue focusing on small savings schemes for stable, predictable returns. Karkera adds, “Diversifying across different tenures and schemes (such as the Senior Citizen Savings Scheme or National Savings Certificate) can help balance risks if there are future rate cuts. It would be wise for investors to lock in current rates, as future reductions in interest rates cannot be ruled out once inflation pressures ease further and the monetary policy becomes more accommodative.”
