The latest buzz across the nation has been about two giant game-changers. One, the Digital India campaign and two, the plausible rate cut across small savings schemes. While the former has hit an ecstatic chord with the masses, the latter is perplexing people about what the possible repercussions of this move could be.
Any plan or move towards cutting the rates of interest for small savings schemes is being rolled out only to keep interest rates in-line with current inflation.
Why the plan to re-peg rates of small savings schemes?
- The rates offered on small savings schemes, like PPF, Post Office Monthly Income Schemes, Post Office Savings Account, Post Office Time Deposit Scheme and Senior Citizen’s Savings Schemes, are fixed in line with returns on government securities. High interest rates on such small savings schemes force banks to keep up interest rates on their deposit products. This, in turn, poses the issue of banks not passing on the benefits of of repo rate cuts announced by the Reserve Bank of India.
In order to lower rates on bank fixed deposits, it is imperative to first reign-in the comparatively high return rates of small savings schemes, which investors will prefer over FDs.
- As per the Ministry of Finance, at any point in time, the inflation regime of the nation defines the interest rate offered to customers; hence, once inflation comes down, return rates too have to be tamed. Going by this principle, pegging the return rate for small savings schemes according to the repo rate will tie these rates closer to the present rate of inflation.
How does a rate revision of small savings schemes affect you?
Rate revisions of small savings schemes will mean a change in PPF interest rates as well as other post office saving scheme rates e.g.Post Office Time Deposit Scheme, Post Office Monthly Income Schemes etc. If pegged to the current repo rate, interest rates on all the above mentioned financial instruments may go down.
However, the government has announced that effects on interest rates for certain small-saver schemes, such as those for the girl child and senior citizens, will be borne in mind while revising interest rates so as not to adversely affect them. There is a close link between small savings schemes and social security in the country, and hence, the rates on these schemes will be tweaked to maintain the current position of the schemes.
Although, it seems like re-pegging of rates on small savings schemes is bound to lower interest amounts earned, it need not necessarily pan out this way. Since, interest rates on these financial tools will be linked to the repo rate, which in turn is linked to the inflation rate, rates will move with respect to current inflation. So, a lower inflation rate will compensate for lower rates of interest, and higher inflation rates will be offset by higher interest rates.
Hence, the move to re-peg rates does not necessarily harm existing customers. Moreover, customers can wisely opt to look at this phenomenon as a cue to diversify their capital into various investment avenues. This can help you reap greater benefits and avoid deeper dents on interest from small savings schemes.