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Small Saving Schemes Interest Rates To Turn Volatile

As was being reported, the Govt. has finally announced its decision to increase the frequency of interest rate revision, on the Post Office Small Saving Schemes. This is effective from the forthcoming financial year.

In addition, it has also announced reduction in the interest rates on certain schemes.

Salient aspects of the Ministry of Finance's notification on 'Interest Rates of Small Saving Schemes' are detailed below.

First big change:

As you know, from the Financial Year 2012-13 onward, interest rates on Small Savings Scheme have been linked to the market rates. Yields prevailing on the Government Securities (G-Secs or Gilts) traded in the market, are taken as the benchmark. Based on the yields of comparable maturity, interest rates on various Small Saving Schemes are revised.

Till now, this rate revision was an annual affair. Every year, in March, the Govt. announced the new rates applicable for the next financial year.

Henceforth, the interest rates on all Post Office Small Savings Schemes would be reset every quarter.

As such, the Govt. will now announce the new rates on 
- Mar 15th : For April-June Qtr (based on month-end G-Sec rates in Dec, Jan, Feb)
- Jun 15th : For July-Sept Qtr (based on month-end G-Sec rates in Mar, Apr, May)
- Sept 15th : For Oct-Dec Qtr (based on month-end G-Sec rates in Jun, Jul, Aug)
- Dec 15th : For Jan-Mar Qtr (based on month-end G-Sec rates in Sept, Oct, Nov)

[Note: The G-sec rates would be as fixed by FIMMDA (Fixed Income Money Market and Derivatives Association of India), a voluntary association of Scheduled Commercial Banks, Public Financial Institutions, Primary Dealers and Insurance Companies.]

The idea behind this move is to minimize the distortion between the market rates and rates fixed for various schemes, that normally arises during the course of next 12 months.

New policy on interest rates on PO Small Savings Schemes is still attractive.

Second big change:

In all schemes, margin is added to the G-Sec rate, to arrive at the applicable rate of interest.

Presently, the mark-up over the G-Sec yield of comparable maturity, is as under:
- For Senior Citizen Savings Scheme : Plus 1.00%
- For Sukanya Samriddhi Yojana : Plus 0.75%
- For 10-year National Saving Certificate : Plus 0.50%
- For all other schemes : Plus 0.25%

Small Savings Schemes are an important tool for financial inclusion, as post offices are present even in villages and small towns (where even the banks have limited or nil presence). Moreover, these schemes combine high returns with complete security.

In view of this social objective and promoting long-term savings, the Govt. has decided to do only some minor tinkering with this mark-up on the interest rates, even though it may hinder banks in bringing down their interest rates.

(As you may know, RBI has cut the policy interest rates by 1.25% since Jan 2015. But, the banks have passed on only around 0.60% reduction to its borrowers. One major constraint for this, as cited by the banks, has been the high interest rates offered by the Govt. on its Small Savings Schemes.)

As such, henceforth, the rates on various schemes would be as under:

1. Schemes where the mark-up (on the G-Sec yield of comparable maturity) would continue
- Sukanya Samriddhi Scheme : + 0.75%
- Senior Citizens Savings Scheme : + 1% 
- Monthly Income Scheme : + 0.25%
- 5-year Time Deposit : + 0.25%
- 5-year National Saving Certificate : + 0.25%
- Public Provident Fund : + 0.25%

2. Schemes where there would be no mark-up on the G-Sec yield of comparable maturity
- 1-year Time Deposit
- 2-year Time Deposit
- 3-year Time Deposit
- 5-year Recurring Deposit
- Kisan Vikas Patra

- There is no change on Saving Deposit Interest Rate, which will continue to be 4%
- 10-year NSC Scheme has been discontinued from Dec 2015

As you will note, interest rates would move down (marginally, of course) for primarily the shorter term Post Office Schemes. Rest of the schemes have been spared the dreaded knife.

In short, welcome to the 'Age of Volatility":

Earlier, only equity and gold prices witnessed daily ups and downs. Of course, nowadays this turbulence is much sharper and steeper (and, consequently, a lot more scary).

Thereafter, it was the turn of bank fixed deposits. RBI shifted from announcing its monetary policy every year to every quarter; and later on a bi-monthly basis. As such, banks have to now reset their interest rates in line with regular changes in RBI's monetary policy stance.

Even property prices, which till recently generally moved only up and up, have witnessed a fall in many pockets across the country. It may, no longer, remain a one-way street to riches.

And now, even the long stable-and-steady interest rates on the Post Office Schemes, will turn erratic. We may now have to live with the fluctuations every quarter.

Other changes:

In addition to the above, the Ministry of Finance has announced a couple of other changes.

One. Presently, the interest on National Savings Certificates (NSCs) and Kisan Vikas Patra (KVP) is compounded on an half-yearly basis. With effect from April 1, 2016, this would be done an annual basis. This is a loss to the investors, as now the effective yield would be somewhat lower.

Two. In genuine cases, such as serious ailment, children's higher education etc., premature closure of PPF accounts would be allowed. This, shall be subject to (a) only after completion of 5 years from the date of opening the account and (b) penalty of 1% lesser interest on the whole deposit.

Important Footnote
The revised interest rates apply only to the new accounts opened during the respective period (except PPF and Sukanya Samriddhi Scheme, where the new rate is applied on the outstanding account balance). For the existing accounts under all other schemes, the contracted interest rate remains unchanged until maturity.

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