Why Lower Rates For Small Savings Are Good News

By BankBazaar | April 1, 2016

Why Lower Rates For Small Savings Is Good News

Design Credits: Vishnu Madhav

The new financial year (2016-17) has possibly started on a bad note for many in our country, with the Government cutting the interest rate on many of its savings schemes including the popular Public Provident Fund (PPF) and KisanVikas Patra (KVP). This is mainly on the back of the Government changing the way interest rates are set for these investments. Until now, interest rates on small savings schemes were set for a full year based on yields from Government securities in the previous year.

Now the interest rates will be reset once every quarter and will be based on the previous 3 months yield from Government securities. This means that now that the rates have been reset on April 1, the next change in interest rates will come on July 1. Also, the interest rates will be decided on the 15th of the previous month. For example, if rates are to be reset on July 1, the new rates will be decided by 15th of June. This gives you time to plan your investments or move your investments, if needed.

Why are interest rates being cut? Consider this: the yield on the ten-year benchmark Government security has fallen from 7.87% in February 2016 to 7.46% now. Given this steep fall in a short time, it is no surprise that small saving schemes, which are linked to Government securities, will be earning lower returns.

The rate cuts will be up to 1.3% for each of the investments. For instance, PPF which gave you 8.7% last year will return only 8.1% for the next three months (April 1 to June 30). The rate for KVP will be 7.8%, down from 8.7%. So, after the revision in rates, it will take more than 9 years to double your KVP investments (with earlier interest rates it would have doubled in 8 years).

Even the Senior Citizens Savings Scheme (SCSS) has met the same fate. Now investments in SCSS will earn only 8.6%, while earlier, it was a good 9.3%. The Sukanya Samriddhi Scheme will get you 8.6% as against the 9.2% it was drawing earlier, while the 5-year National Savings Scheme (NSC) will earn an interest of 8.1% for the next three months.

However, the Government will now allow you to prematurely close your PPF accounts if you have an urgent requirement for funds and if you have held the account for five or more years. But note that this should be for genuine cases like critical illness or your children’s higher education. Also, there is a penalty of 1% on the interest rate for such closure.

In the wake of the Government cutting small savings rates, it is expected that Indian banks will follow suit for their deposits. Historically, bank deposits have always earned less than small savings schemes. If this is worrying you, don’t let it, because deposit rate cuts might turn out to be good news soon. When banks start cutting deposit rates, they need to begin lowering their lending rates too. This means that very soon you might be able to pay lower interest on your loans. It is even better for those who are looking to take on new loans. So, start scouting for those loans and keep your eyes and ears open for the rate cuts that might be coming up.

Additional Reading: Benefits Of Investing In A Savings Scheme

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