Will your PPF, NSC, SCSS see interest rate cut? Know what experts are saying

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NEW DELHI: Interest rates on small saving schemes (SSS) such as Public Provident Funds (PPF), Senior Citizens Saving Schemes (SCSS), National Saving Certificate (NSC), Kisan Vikas Patra (KVP) will be reviewed in a couple of days.

Last quarter, the government had withdrawn a notification which revised lower the interest rates, calling it an “oversight”. There was speculation that the notification was withdrawn given that elections were on in West Bengal at that time.

Experts believe the government is unlikely to lower interest rates on small saving schemes amid rising inflation. Madan Sabnavis, chief economist, Care Ratings said, “ It is unlikely that the government will reduce the rates. The rising inflation will not let them do so.”

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The Reserve Bank of India (RBI) in its latest monetary policy statement had expressed concern about rising inflation and said it was likely to remain around 5% for the rest of the financial year 2021. Rising inflation has come as a double whammy for investors as interest rates on bank fixed deposits are at a multi-year low. This has pushed the original return rates (nominal interest rates minus inflation) in negative territory.

If one goes by the formulae through which interest rates on small saving schemes are calculated, ideally the rates should go down. Interest rates are pegged to yields of the government securities of similar maturity. Plus, there is a markup added by the government. So, on PPF the mark-up is 0.25%. The markup is added to the quarterly average of G-sec yield of the previous quarter.

Currently, PPF offers an interest rate of 7.1% which is way higher than that of the G-sec yields even after including the mark-up. The current yield on the 10-year benchmark G-sec is around 6%.

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“They have a reason to cut the interest rate on small saving schemes as G-sec yields have fallen since last time rates were changed. In April it was not done due to the elections but today with high inflation it will not be popular,” said Sabnavis.

Madan believes that it is time for the government to review the system of determining the interest rates on small savings schemes.

“There is definitely a strong reason to review this system of fixing rates for small savings by linking to the market as the measures of the central bank are ensuring that the yield curve will not move up through direct action as stated in the credit policy. In that case, it is no longer reflective of the market and linking the small savings rate to them will give a distorted picture,” said Sabnavis.

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As an investor, you should continue to invest in small saving schemes as the interest rate offered is higher than that of bank deposits plus some of the schemes like PPF, SCSS, NSC also offer tax benefits.

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