The interest rate of Senior Citizen Savings Scheme has been increased by 20 bps to 7.6% and Kisan Vikas Patra to 7%. Interest rates of other small savings schemes like PPF and Sukanya Samriddhi Yojana have been kept unchanged.
Have a look at the interest rates on various small savings schemes for the third quarter of the financial year 2022-23.
Source: Ministry of Finance Circulars
The last rate hike was done in 2018 for the October-December quarter.
The latest interest rate hike was expected as government bond yields rose. Small savings rates are linked to government bond yields of equal maturity and are reset every quarter. Due to political compulsions, the government kept the rates of small savings schemes unchanged, even though interest rates on fixed income instruments like FDs were cut. There has been a steady decline in bond yields during 2020-21. If you recall, the massive 60-70 base rate cut in small savings schemes was hastily withdrawn after the public uproar in April 2021.
Now that bond yields have risen sharply, small savings rates have been revised upwards.
Fixed Income Investors: Very Happy
The Reserve Bank of India (RBI) has been increasing key rates from May 2022. The apex bank has increased the repo rate by 140 bps in four MPC meetings. Because of this banks are increasing the interest rates on Fixed Deposits (FDs), which is good news for FD investors sitting with low interest rates for decades.
FD, Bank Saving Account or Small Saving Scheme?
Even though banks have started increasing FD interest rates, many small savings schemes are still getting higher interest rates.
State Bank Of IndiaFDs earn from 5.45 per cent to 5.65 per cent in the 1-10-year period till August 18, 2022. Senior citizens earning 0.5 percent more will get 5.95 percent to 6.45 percent for these periods.
Apart from fixed deposits, the interest rate on savings accounts offered by some large banks is also lower than the interest rate on post office savings account.
Post office savings account is currently offering 4% p.a while SBI is offering 2.70% p.a. interest rate on its savings account. Similarly, ICICI Bank is offering 3-3.5% per annum.
How interest rates are determined for small savings schemes
The interest rates on small savings schemes are reviewed by the government every quarter. The formula for coming to the interest rates for the small savings scheme was given by the Shyamala Gopinath Committee. The committee had suggested that the interest rates of various schemes should be 25-100 bps higher than the yield of government bonds of similar maturity.