Recent news for investors of small savings schemes has brought major relief as interest rates so far have not been reduced. While Bond yields have witnessed quite a fall in the past 3 months, it was logical and expected that interest rates for other small schemes would also see a cut. Small savings schemes have always been a safe and affordable investment option for the majority of middle class professionals and entrepreneurs in India. Owing to this, the interest rate cuts have not turned out the way it was expected which might be due to fear of backlash from the middle class preventing the government from reducing the rates. Trend observers state that this this rate may prevail for a few more quarters as this is primarily dependent on the current political scenario and a decision made by the Ministry of Finance. Recent circular issued by the Ministry for the Public Provident Fund and Sukanya Samriddhi Yojana also remains unchanged.
In spite of the reliable trends however, investors should not blindly go for small savings schemes but weigh the pros and cons since every investment has specific features which must be assessed in the long term scenario.
1-year post office time deposit or POTD, another small savings scheme has seen an increase by 10 basis points for the upcoming quarter of January-March 2019. In comparison to the last quarter, POTD will now attract an interest of 7 per cent, an increase from 6.9 per cent while the three-year POTD has seen a decrease in the rate by 20 bps. What remains unchanged is the 2 and 5 year POTD which continues at an interest rate of 7 and 7.8 per cent respectively. This roughly translates to higher interest rates for one-year fixed deposits and lower yields for 3-year FDs.
Several other small savings scheme interest rates also remain unchanged. These include the Senior Citizen Savings Scheme (SCSS) and the Kisan Vikas Patra (KVP). The former continues with an interest return of 8.7 per cent and the latter at 7.7 per cent. The previous quarter had seen a hike from 30 to 40 bps for several such other small savings schemes.
The Credit-Linked Subsidy Scheme of CLSS has also seen an extension by another 12 months catering to middle income groups which is expected to benefit prospective middle class home buyers. When this scheme was launched it was targeted at young middle class professionals and entrepreneurs seeking housing loans.
The current benchmark of the interest rates for the schemes are measured against the government bonds having similar maturity. An average of the government yield in the previous quarter is taken into account and interest rates are calculated on that basis. This formula was suggested by the Shyamala Gopinath Committee in order to determine an interest rate for the available schemes. According to the committee, interest rates should be kept at a range of 25-100 basis points higher than the government bond yields having a similar maturity.