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Small Savings Schemes Rate Cut is Fantastic News

Since last 12-15 months, inflation has softened significantly. RBI / Banks too have reduced their lending and deposit rates. As such, a cut in the interest rates on Post Office Small Savings Schemes was always on the cards.

But before you crib and cry, you must read Dr. Raghuram Rajan's brilliant Dosa Economics.

You would, by now be aware that, interest rates on Post Office Small Savings Schemes are linked to the yields prevailing on the Govt. Securities (GSecs) traded in the market. Further, these rates are revised and reset on an annual basis.

However, as I had recently discussed in my blog post Small Saving Schemes Interest Rates To Turn Volatile
a) interest rates on Small Savings Schemes would now be reset every quarter, and
b) some of the schemes will no longer enjoy the margin on GSecs rates as earlier.

Accordingly, the Ministry of Finance has now announced the interest rates on various Small Savings Schemes for the first quarter of the Financial Year 2016-17. In other words, the new rates are applicable for the period Apr 1 to Jun 30, 2016.

The same are detailed below:

Public Provident Fund : Down from 8.7% to 8.1%

5-year NSC : Down from 8.5% to 8.1%
10-year NSC : This was discontinued w.e.f. Dec 2015

Monthly Income Scheme : Down from 8.7% to 7.8%

Senior Citizens Savings Scheme : Down from 9.3% to 8.6%

1-year Time Deposit : Down from 8.4% to 7.1%
2-year Time Deposit : Down from 8.4% to 7.2%
3-year Time Deposit : Down from 8.4% to 7.4%
5-year Time Deposit : Down from 8.5% to 7.9%

5-year Recurring Deposit : Down from 8.4% to 7.4%

Savings Deposit : No change at 4%

Kisan Vikas Patra : Down from 8.7% to 7.8% (The scheme will now double your money in 110 months as against 100 months earlier)

Sukanya Samriddhi Scheme : Down from from 9.1% to 8.6%

Have the new Small Savings Schemes interest rates left you deeply dejected?

As you will observe, for most of the schemes there is a steep reduction in the interest rates for Q1 2016-17. The drop is more severe where the mark-up on the GSec rates has been removed viz. 1-year, 2-year and 3-year Time Deposits, 5-year Recurring Deposit and the Kisan Vikas Patra.

But, don't despair:

If you are still not convinced about the benefits of low interest rates in the economy, as explained by Dr. Raghuran Rajan, please reflect back on the period 2003 to 2007. This was indeed a golden era with low rates and low inflation, which led to an unprecedented boom in the economy.

One one hand, salaries, property, equity, gold... all were multiplying faster than you could calculate. On the other hand, home loans and other borrowings were available at real cheap rates.

The recent cut in the interest rates on the Small Savings Schemes is going to trigger a (beneficial) chain reaction. 

As such, I believe that within the next couple of weeks, we can expect another sharp cut in the interest rates on our home loans, vehicle loans, etc.

And in a year or two, the economic boom may repeat itself. If you are not investing in the equity mutual funds (and sticking to fixed deposits, insurance and gold), you are likely to miss a golden opportunity.

This is a game-changer event. Be prepared to be surprised.

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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