Savings scheme

PPF, the interest rate of other small savings plans could be raised from July

The Indian government decides the interest rates on these savings schemes every 3 months of the year. The Center will announce the new interest rates for the period July to September 2022, by the end of this month. It is believed that the interest rate of these schemes will be increased due to the rise in g-secs.

According to Global Government Bonds data, on Wednesday, India’s 10-year government bond yield stood at 7.460%, which was up 99.9 basis points in six months and 11 basis points in 1 month. While the 5-year yield is at 7.269%, up 140.4 basis points in 6 months and 12.8 basis points in 1 month.

The 2-year and 3-year g-sec yields are at 6.603% and 7.005%, up 163.3 basis points and 171 basis points in six months. While the jump is around 28.2 points and 14.8 basis points in one month.

The 1-year g-sec yield has climbed 207.1 basis points in six months and stands at 6.303%. In one month, this yield soared by 39.1 basis points.

For the shorter durations, the 3 and 6 month g-sec yields are at 5.090% and 5.770%, increasing by 146 basis points and 184 basis points in six months.

From April 1 to June 30, 2022, the interest rate for the postal savings account is 4%, while term deposits of 1 to 3 years are remunerated at 5.5% each. The 5-year term deposit rate is 6.7%, while the 5-year recurring deposit system rate is 5.8%.

The savings plan for the elderly has an interest rate of 7.45, while the interest rate for the Monthly Income Account (MIS) is 6.6% and the interest rate for the certificate of National Savings (NSC) is 6.8%.

The public provident fund scheme has an interest rate of 7.1%, on the other hand, the rate is 6.9% on Kisan Vikas Patra and 7.6% on the Sukanya Samriddhi account scheme.

CIFAR economists said in their latest report that interest rates on various small savings plans have not changed in the past eight quarters since the first quarter of fiscal 2021. small savings plans for the second quarter of fiscal 2023 are expected to be announced at the end of June 2022.

Average month-end yields on G-Sec for one-year, two-year and five-year bonds rose significantly by 138 basis points, 93 basis points and 79 basis points, respectively, from March, according to economists. 2022 to May. 2022, after increasing by 38 basis points, 31 basis points and 31 basis points, respectively, between December 2021 and February 2022.

So, the ICRA economists said, “we expect interest rates on small savings plans to be raised for the second quarter of fiscal 2023, given the sharp increases seen in the G-Sec yields of various maturities, to which these rates are tied.An increase in small savings interest rates could lead to higher flows into these schemes, limiting the need for additional market borrowing due to overspending. budget deficit.”

In March 2016, in line with the recommendations of the Shyamala Gopinath Committee to ensure that small savings schemes are linked to the market, the Ministry of Finance announced that instead of an annual reset of the interest rates of small savings plans for the following financial year, interest rates will now be reset quarterly based on G-Sec returns for the previous three months.

The Gopinath committee had recommended keeping the interest rates for small savings 25 to 100 basis points higher than the average yields on public securities.

FinMin in 2016 announced the additional interest rate spreads on small savings schemes such as PPF, Senior Citizen Savings Scheme, Sukanya Samridhi Scheme, NSC, etc. The additional spread is 25 basis points for PPF, 100 basis points for Senior Citizen Savings Scheme, 75 basis points for Sukanya Samridhi Scheme, 25 basis points for Five-Year Term Deposit, 25 basis points for the National Savings Certificate and 25 basis points for the Monthly Income Scheme. These additional interest rate differentials are maintained.

Government Security (G-Sec) is a negotiable instrument issued by the central government and state governments. The instrument represents government debt. Notably, these securities are short-term (called treasury bills, with original maturities of less than one year) or long-term (such as government bonds or maturity securities with an original maturity of one year or more).

In India, the central government issues both treasury bills and dated bonds or securities, while state governments issue only dated bonds or securities, known as State Development Loans (SDLs). According to the RBI FAQ, G-Secs carry virtually no risk of default and hence are referred to as risk-free golden instruments.

Another reason for the rise in small public savings schemes could be due to banks raising their interest rates on fixed deposits under a scenario of rising repo rates. To compete with bank FDs and make postal savings attractive to customers, the government may raise interest rates for these schemes.

Over the past two policies, RBI has increased the policy repo rate by 90 basis points. The first increase was 40 basis points in May and the second was 50 basis points in June. Now, the policy’s repo rate is 4.90%. There is more room for rate hikes as RBI focuses on containing high multi-year inflation.

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