There is heavy speculation that the government may finally increase interest rates on small savings schemes such as Public Provident Fund (PPF), Sukanya Samriddhi Savings Scheme, Senior Citizen Savings Scheme (SCSS), and National Savings Scheme (NCS) in the forthcoming rate review on September 30.
Notably, the interest rates on these small savings are calculated based on yields of government bonds also known as government securities or G-sec. The government reviews these interest rates every quarter with respect to the average g-sec yields in the last three months.
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The benchmark 10-year yield has been above 7% since April 2022 and has averaged 7.31% in June to August 2021, making a strong case for a rate revision in the upcoming review.
According to a formula for the calculation of interest on PPF notified by the Finance Ministry on March 18, 2016, PPF interest may increase to 7.56% in the October-December quarter. PPF interest rate is 25 basis points higher than the average 3-month G-sec yield. Currently, the PPF gives 7.1%.
Similarly, the interest rate of the Sukanya Samriddhi Savings Scheme should be 75 basis points over the G-sec yield but SSA currently gives 7.6%. The interest rate on the Senior Citizen Scheme is 100 basis points above G-sec yield three-month average.
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However, in practice, the government revises the interest rates, based on the formulae above, after a significant lag. Interest rates on small savings schemes have remained unchanged since September 2020; they were revised downwards last in April-September 2020 quarter. Now that bond yields have been high for some time, the interest rates on small schemes may be revised upwards.
According to the Reserve Bank of India, small savings schemes are linked to G-sec market yields with a lag and are reviewed every quarter at a spread ranging from 0 to 100 basis points and above G-sec yields of comparable maturities.
