NEW DELHI: The government has reduced interest rates on small saving schemes, including the Public Provident Fund (PPF), NSCs and Kisan Vikas Patra by 10 basis points. PPF and NSCs will now earn 7.8%, while KVPs will fetch only 7.5%. Prior to this rate cut, PPF, NSC and KVP were offering 7.9 percent, 7.9 percent and 7.6 percent respectively.
The Senior Citizen’s Savings Scheme and Sukanya Samriddhi Yojana will now offer 8.3%. Both Senior Citizen’s Savings Scheme and Sukanya Samriddh were earlier offering 8.4 percent.
Interest rates on small savings are linked to the benchmark 10-year government bond yields and are revised every three months. The last revision took place in March, when the rates for all schemes had been reduced by 10 basis points.
Observers say the government is not going by the Gopinath panel formula in fixing rates. According to that formula, PPF rate should be 50 basis point above the benchmark bond yield. Given that the 10-year bond yield is hovering around 6.5%, the PPF rates should be not more than 7%. “Now the formula is to reduce the rates by 10 basis points every quarter,” says Manoj Nagpal, CEO of Outlook Asia Capital. This calibrated approach has been taken to reduce the political impact of the rate cut.
Though the rate cut will definitely hurt savers, keep in mind that the real rate of interest is still quite attractive. Retail inflation has come down in recent quarters, declining to 2.1% in May from 2.99% in April. May's retail inflation is the lowest since the government began issuing data based on the consumer price index (CPI) in 2012. “In that context, the real rate of interest offered by small savings schemes is still quite attractive,” says Nagpal.
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