Interest rate of Senior Citizen Savings Scheme has been hiked by 20 bps to 7.6% and Kisan Vikas Patra has been increased to 7%. Interest rates of rest of the small savings schemes like PPF and Sukanya Samriddhi Yojana have been kept unchanged.
Here is a look at the interest rates on various small savings schemes for the third quarter of FY 2022-23.
Source: Finance ministry circular
The last time the rates were increased was in 2018 for the October-December quarter.
The latest interest rate hike was expected as the government bond yields have risen. Small savings rates are linked to government bond yields of the same maturity and are reset every quarter. Thanks to political compulsions, even though interest rates of fixed income instruments like the FD were cut, the government kept the rates of small savings schemes unchanged. Bond yields consistently declined during 2020-21. If you remember, a steep 60-70 basis rate cut in small savings schemes was hastily rolled back in April 2021 following a public uproar.
Now that bond yields have risen sharply, small savings rates have been revised upwards.
Fixed income investors: A happy lot
The Reserve Bank of India (RBI) has been increasing key rates since May 2022. The apex bank has increased the repo rate by 140 bps over four MPC meetings. Due to this, banks have been increasing interest rates on fixed deposits (FD) which is good news for FD investors who have been sitting with decadal low interest rates.
FDs, bank savings accounts or small saving schemes?
Even though banks have started increasing FD interest rates, many small savings schemes are still earning higher interest rates.
SBI‘s FDs across 1-10-year tenors, as on August 18, 2022, earn 5.45 percent to 5.65 percent. Senior citizens, who earn 0.5 percent more, will get 5.95 percent to 6.45 percent for these tenors.
Apart from fixed deposits, even the interest rates on savings accounts offered by some of the bigger banks is lower than the interest rate on the post office savings account.
Post office savings account is currently offering 4% per annum whereas SBI is offering 2.70% per annum interest rate on its savings account. Similarly, ICICI Bank is offering 3-3.5% per annum.
How interest rates are set for small savings schemes
The interest rates on small savings schemes are reviewed every quarter by the government. The formula to arrive at the interest rates for small savings scheme was given by the Shyamala Gopinath Committee. The committee had suggested that the interest rates of different schemes should be 25-100 bps higher than the yields of the government bonds of similar maturity.