No hike in small savings rates

Belies hopes of a hike amid surge in inflation and government bond yields

The government has left the interest rates on small savings schemes such as the Public Provident Fund (PPF) and the National Savings Certificate (NSC) unchanged for the July-September quarter.

A hike in small savings rate was expected in view of a surge in yields on government bonds, to which their returns are linked as per a formula, amid a surge in inflation and increases in key interest rates by the central bank.

“The status quo on small savings rates for the next quarter is contrary to our expectations of a hike in rates, given the sharp increases seen in the yields on government securities of various maturities,” said ICRA chief economist Aditi Nayar.

This is the ninth quarter in a row that small savings rates have been held at the same level after rates were reduced in the range of 0.5% to 1.1% on different instruments for the April to June 2020 quarter. Further cuts, ranging from 0.4% to 1.1%, were announced for the April to June 2021 quarter but revoked overnight, citing an ‘oversight’.

For July to September, the Sukanya Samriddhi scheme will continue to earn 7.6%, the Senior Citizens Saving Scheme will earn 7.4%, followed by PPF (7.1%), Kisan Vikas Patra (6.9%), NSC (6.8%) and five-year term deposits, which will be credited with 6.7% interest.

In April, the Reserve Bank of India had said the rise in government bond yields had led to a reduction in the gap between the announced interest rates on small savings over the formula-based rates to a range of 9 to 118 basis points for the April to June quarter, from a range of 42-168 basis points in the previous quarter. One basis point equals 0.01%.

However, yields have risen further since then. After hitting a four-year high of 7.6% during June, yields on government bonds with a maturity of 10 years stood at 7.46% on June 29. With the central bank expected to hike interest rates further in the coming months to rein in runaway inflation, ICRA projected last week that the yield on these bonds could rise further to as much as 7.75%-8% in the July-September quarter.