One-three year deposits see at least 1% interest rate hike

Amid rising yields on government securities and interest rates, the Finance Ministry on Friday hiked the interest rates for some small savings schemes by 20-110 basis points for the upcoming January-March quarter. While interest rates have been kept unchanged for a 5-year recurring deposit, public provident fund scheme and Sukanya Samriddhi scheme, rates for 1-year, 2-year, 3-year and 5-year times deposits and senior citizens savings scheme have been hiked.

After keeping small savings rates unchanged for nine consecutive quarters, the Finance Ministry had hiked interest rates on some of the small savings schemes by 10-30 basis points for October-December and not done it uniformly for all schemes. Interest rates were marginally hiked for 2-year and 3-year time deposits, senior citizens savings scheme and Kisan Vikas Patra, while rates for other schemes were unchanged in the previous quarter. The changes have come amid a higher inflation rate and a rising interest rate cycle. Since April, the Reserve Bank of India has hiked the key policy rate by 225 basis points. In its Monetary Policy Report released on September 30, the RBI noted that with government bond yields increasing, the revised small savings rates were 44-77 basis points below the formula implied rates. The view within the ministry for hiking rates has been to balance the interests of senior citizens, persons saving in instruments without tax benefits along with keeping the interest rate for small savings in check, which essentially translates into a higher interest cost for the government when it borrows against the National Small Saving Fund. Interest rates on small saving schemes are reset quarterly, in line with the movement in benchmark government bonds of similar maturity.

Typically, the small-saving rates are linked to yields on benchmark government bonds, but despite the movement in G-sec yields, the interest rate changes have not strictly matched the yield movements over the last two years.

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The reference period for small savings rates for the January-March quarter is September-November when the yield for five-year government securities rose about 15 basis points.Among the most popular fixed-income products, the National Savings Certificate will yield 7.0 per cent as against 6.8 per cent earlier.

Rates on the Public Provident Fund (PPF) will be unchanged at 7.1 per cent, while the interest rate for girl child savings scheme Sukanya Samriddhi Yojana also remains constant at 7.6 per cent. The interest rate on savings deposits will continue to be 4 per cent per annum. EPF continues to have a higher interest rate for its subscribers despite the rate being reduced to 8.1 per cent for FY22 – the lowest in four decades.

The interest rates were earlier revised for the first quarter of 2021-22 (April-March) and reduced sharply by 40-110 basis points, but the decision was later rolled back, with the finance minister saying that the “orders issued by oversight shall be withdrawn”. The reduction of interest rates and the subsequent withdrawal had happened in the run up to the West Bengal assembly elections. Prior to that, the interest rates were revised two years ago for the first quarter of 2020-21.