Returns on small saving schemes to fall

The five-year recurring deposits, one-year, two-year and three-year term deposits will stand to lose their interest rate advantage

  

Returns on small saving schemes like Kisan Vikas Patra, National Savings Certificate to fall from April 1

Interest rates on popular small savings such as Kisan Vikas Patra, National Savings Certificate and post office recurring deposit schemes are set to come down from April 1 as the government rearranges  the interest rate framework for these schemes to align it with market rates.

Interest rates of these schemes will now be reset every quarter as part of this rearrangement , a finance ministry statement said on Tuesday.
"This is expected to help the economy move to a lower overall interest rate regime eventually and thereby help all, particularly low-income and salaried classes," it said, explaining the rationale behind this move.

Sukanya Samriddhi Yojana , senior citizen savings scheme and the monthly income scheme that enjoy interest rate and spread over the G-sec (1)rate of comparable maturity that is of 75 basis points, (2)100 bps and 25 bps respectively have been left untouched by the government.

Spread of 25 bps that long term instruments, such as the five-year term deposit, five-year National Saving Certificates and Public Provident Fund (PPF) currently enjoy over G-Secs of comparable maturity have also been left untouched as these schemes are particularly relevant to the self-employed professional and salaried classes, it added.

The five-year recurring deposits, and one-year, two-year and three-year term deposits, however, will stand to lose their interest rate advantage with the government removing the 25 bps spread over G-sec of similar maturity from April 1, 2016.

"The interest rates of all small saving schemes would be recalibrated w.e.f. 1.4.2016 on a quarterly basis as given under, to align the small saving interest rates with the market rates of the relevant government securities," the statement said, adding that small savings interest rates are perceived to limit the banking sector's ability to lower deposit rates in response to the monetary policy of the Reserve Bank of India.

The government has decided to allow for premature closure of PPF accounts in cases such as that of  serious ailment, higher education of children, This shall be permitted with a penalty of 1% reduction in interest payable on the whole deposit and only for the accounts having completed five years from the date of opening, it said.

The weighted average yield of dated G-secs was 7.94% in April-September 2015 compared with 8.81% in the first half of the preceding year, potentially opening up the possibility of an up to 1% point reduction in the small savings rate.

Issue of higher interest rates on small savings schemes impacting monetary transmission had been flagged by the RBI to the government.

Banks had also raised the issue at the pre-budget consultations held with finance minister .

(1)  Government security (G-Sec) means a security created and issued by the Government for the purpose of raising a public loan or any other purpose as notified by the Government in the Official Gazette 

(2)  In financial terms, 'one'  Basis Point is a unit  equivalent to  0.01% i.e. 1/100th of a percent.     Thus 10 bps means 0.10% and   100 bps means 1%.    BPs is mostly used to indicate the changes in interest rates and also bond yields.   .