In order not to face the anger of bond investors, for the sixth consecutive quarter, the government kept the interest rates on small savings plans unchanged. This means that for the quarter ending December 31, 2021, investors in small savings plans like the Public Provident Fund (PPF) and Sukanya Samriddhi Yojana (SSY) will continue to receive the same interest rate as they do. earned during the quarter ending September 30, 2021. New investments made during the October-December 2021 quarter in these plans will also be remunerated at the same interest rates as in the previous quarter.

This was announced by the Ministry of Finance via a circular dated September 30, 2021. According to the ministry circular, the PPF will continue to earn 7.1%, the NSC will earn 6.8% and the monthly income scheme account of the post office will gain 6.6%.

Here is an overview of the interest rates on various small savings plans for the third quarter of fiscal year 2021-22.

Instrument Interest rate (%) from October 1, 2021 to December 31, 2021 Compound frequency
Savings account 4 Annually
1 year term deposit 5.5 Quarterly
2 year term deposit 5.5 Quarterly
3 year term deposit 5.5 Quarterly
5-year term deposit 6.7 Quarterly
5-year recurring deposit 5.8 Quarterly
5-year Seniors Savings Plan 7.4 Quarterly and Paid
5 year monthly income account 6.6 Monthly and paid
5-year National Savings Certificate 6.8 Annually
Public provident fund 7.1 Annually
Kisan Vikas Patra 6.9 (will expire in 124 months) Annually
Sukanya Samriddhi Yojana 7.6 Annually

Source: circular from the Ministry of Finance

Relief for debt investors

The government’s status quo on small savings rates comes just over a week ahead of the RBI’s bimonthly monetary policy review. The apex bank would once again maintain the status quo on key rates, which is once again a reason to encourage investors in fixed income products.

This is because with the RBI keeping rates unchanged, banks can no longer reduce interest rates on FDs.

FD, bank savings accounts or small savings plans?

Although banks have not cut FD rates for a few months now, small savings plans, on the whole, continue to earn higher interest rates.

Here’s the math: Investing Rs 1 lakh in SBI 1-year FD will earn you Rs 1,04,991 (4.90% interest rate) while investing in the post office term deposit will earn you Rs 1,04,991 (4.90% interest rate). Rs 1.05,614 (5.5% interest rate), assuming quarterly compounding. This is a difference of Rs 623.

Aside from term deposits, even the interest rates on savings accounts offered by some of the larger banks are lower than the interest rate on Post Office savings accounts.

The Post’s savings account currently offers 4% per annum while SBI offers an interest rate of 2.70% per annum on its savings account. Likewise, ICICI Bank offers 3-3.5% per annum.

The debacle of falling savings rates

On March 31, 2021, the government had indeed announced a reduction in the rates of small savings for the quarter ending June 30, 2021. At the end of the evening of March 31, 2021, the Ministry of Finance had announced that the interest rates on small savings had been sharply reduced from 40 to 110 basis points (100 basis points / bp = 1%) for the first quarter of fiscal year 2021-22. After this drop, the interest rate on the PPF interest rate would have fallen below 7%, the first time since 1974, a low in 46 years.

Then immediately via an early morning tweet, the government announced that the sharp drop in interest rates on small savings plans had been reversed.

How interest rates are set for small savings plans

The government reviews and announces the interest rates on small savings plans every three months. The formula for calculating interest rates on small savings plans was suggested by the Shyamala Gopinath Committee. The committee had suggested that the interest rates of the different regimes should be 25 to 100 basis points higher than the yields on government bonds of similar maturity.

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