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Small Savings rate hiked
The government has hiked interest rate on small savings schemes including public provident fund or PPF, which will now fetch 8% interest rate for the October to December quarter, up from 7.6% in the current quarter. Among other small savings schemes, Sukanya Samriddhi Account scheme will now fetch 8.5% interest rate as compared to 8.1% earlier. The decision to increase small savings rate was announced by the finance ministry today. The interest rates on small savings schemes, which are benchmarked to yields on government bonds, are revised on a quarterly basis. With the 10-year benchmark yield now above 8%, many analysts had expected the government to hike interest rate on small savings schemes.
The government has hiked interest rates of various small savings schemes for the third quarter (October 1 to December 31) by up to 40 bps. These schemes include the Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), National Savings Certificate (NSC), and post office time deposits.
This is a welcome relief for fixed income investors as rates have remained unchanged for the previous two quarters.
Added to that, the government had reduced the interest rates on these schemes in January -March 2018, quarter.
According to a circular issued by the Finance Ministry on September 19, the interest rates of various small saving schemes have been hiked by between 30 basis points and 40 basis points. (One percentage point is equivalent to 100 basis points.)
The one year, two-year and three-year time deposit interest rates have been hiked by 30 basis points. Rates for other schemes such as the five-year time deposit, Sukanya Samriddhi Scheme and PPF have been increased by 40 basis points. After the hike, PPF and NSC will earn 8 percent, the Sukanya Samriddhi Scheme will fetch 8.5 percent, and the Senior Citizens’ Savings Scheme will get you 8.7 percent.
The interest rate on Kisan Vikas Patra or KVP has been hiked to 7.7% from 7.3%. This means that KVP will now mature or double in 112 months as compared to 118 months earlier.
The 5-year National Savings Certificate or NSC will now fetch 8%, the same rate as that of PPF, from 7.6% currently.
The interest rate on popular 5-year Senior Citizen Savings Scheme has been hiked to 8.7% from 8.3%.
Similarly, the interest rate on post office Monthly Income Scheme or MIS has been hiked to 7.7% from 7.3%.
The five-year post office recurring deposit or RD scheme will fetch 7.3%, from 6.9% earlier. The interest rates on post office term deposits have also been hiked. The five-year post office time deposit will offer an interest rate of 7.8%, up from 7.4%. Investment in 5-year post office deposit also qualifies for income tax benefits under Section 80C.
The 3-year post office deposit will now fetch 7.2% (up from 6.9%), 2-year deposit 7% ( up from 6.7%) and the 1-year deposit 6.9% ( up from 6.6%).
The post office savings deposit interest rate has been kept unchanged at 4%.
The RBI had raised interest rate in August for the second straight meeting, but retained its “neutral” stance as it aimed to contain inflation while not choking growth. With the interest rate on small savings scheme going up sharply, banks would be under pressure to increase deposit rate.
However, interest rate on the post office savings account balance has been kept unchanged at 4 per cent.
The expectation of a hike in interest rates was building up for quite some time because the government has bench-marked these schemes to the yields of government bonds of the same maturity. The interest rates on these schemes are calculated by adding a mark-up to the average of the government yield in the preceding quarter.
The committee had suggested that the interest rates of different schemes should be 25 – 100 basis points higher than the yields of the government bonds of similar maturity.
The country’s central bank, Reserve Bank of India (RBI) has also hiked the repo rate cumulatively by 50 basis points in its last two bi-monthly monetary policies announced in June and August 2018.