Monday 24 May 2021

Small savings may be rewarding


With the possibility of a downward revision in rates looming, it’s time to consider your options here

Joydeep Sen

We are all aware of the flurry of activity that happened at the start of the current financial year: interest rates on Small Savings Schemes, of which the Post Office Schemes are a part, were reduced drastically through a government notification, on March 31.

The very next day, the order was withdrawn and the erstwhile rates were maintained.

As an example, the rate on the National Savings Certificate was reduced from 6.8% to 5.9%, that on the Monthly Income Scheme from 6.6% to 5.7%, and the like, but they were are all reversed on April 1.

Please find below a perspective on how attractive these rates are and the real import of the erstwhile rates being maintained.

Aligning with G-Secs

As per a historical decision of the government, the rate of interest on Small Savings Schemes are aligned with the Government Security (G-Sec) rates of similar maturity with a spread of 25 basis points (bps), with certain exceptions.

As an example, the spread on Senior Citizens Savings Scheme will be 100 basis points (bps) over comparable maturity G-Secs (100 bps equal to 1 percentage point).

The rationale for linking it with G-Sec yields in the secondary market is that it is in line with interest rate movements; G-Sec yield movements reflect the actual and anticipated events in the economy pertaining to rate movement. So, if the benchmark G-Sec rate is X% and the mark-up as per formula is Y%. Hence the rate should be X% plus Y%.

However, if the rate is higher, say X% plus Y% plus Z%, then Z represents the generosity of the government for the benefit of citizens. The rates on Small Savings Schemes are reviewed every quarter. However, the rates are not revised downward every quarter even when G-Sec rates come down. We will look at the current rates one by one.

The Post Office Savings Deposit rate is at 4%.

Public Provident Fund (PPF), which is a 15-year scheme (though it can be extended), is supposed to have a mark-up spread of 25 basis points. The relevant G-Sec rate, which is the average of G-Sec of corresponding maturity from December 2020 to February 2021, relevant for the quarter April to June 2021 was 6.16%. By that logic, the PPF rate should have been 6.41% (6.16% + 0.25%) whereas the rate of 7.1% has been maintained. This represents an additional return of 69 bps (7.1% - 6.41%). This 0.69% is the extra or ‘Z%‘ mentioned earlier.

To be noted, in the withdrawn notification, it was reduced to 6.4%, which was in line with the formula.

Post Office Term deposits of 1, 2 and 3-year maturities are to be maintained at the corresponding G-Sec rate, without any mark-up spread.

The relevant G-Sec yield for the quarter April to June 2021, was 3.52% for 1-year, 4.02% for 2-year and 4.51% for 3-years. As against this, the erstwhile rates, maintained for the quarter April to June 2021, are as high as 5.5% for all these tenures. That is, additional interest rate (Z%) offered is 198 bps (almost 2%) for 1-year, 148 bps for 2-year (approximately 1.5%) and 99 bps (approximately 1%) for 3-year.

For the 5-year term deposit, the mark-up spread is 25 bps. Against the reference G-Sec yield of 5.51%, it should have been 5.76%. The rate for 5-year TD is 6.7% and the excess interest is 0.94%. For the Recurring Deposit Account, the reference point is 4.51% with zero mark-up and the rate is 5.8%. Hence, the additional interest is quite high at 1.29%.

The Monthly Income Scheme (MIS) has a mark-up of 25 bps; the reference G-Sec yield is 5.49% and the formula rate is 5.74%. The actual rate is 6.6% and the extra interest (Z%) is 0.86%.

The Kisan Vikas Patra (KVP) is at zero spread; given that the reference point is at 6.16% and the rate is at 6.9%, the additional interest over and above the formula rate is 0.74%.

For the NSC VIII Issue, with a mark-up of 25 bps, the formula rate is 5.88%. At 6.8%, the additional interest is 0.92%.

Senior Citizen Savings Scheme (SCSS), as mentioned earlier, has the highest mark-up spread of 1% over the reference G-Sec yield, as a social benevolence to take care of seniors, who may not have active income. At the reference 5-year G-Sec yield of 5.51%, the formula rate is 6.51%. The rate on offer is 7.4%, implying an additional interest (Z%) of 0.89%. The last one is the Sukanya Samriddhi Account Scheme, which has the longest tenure of 21 years. The formula mark-up is 75 bps. The reference G-Sec yield is 6.16%. Against the formula rate of 6.91%, the rate is 7.6%. The additional interest the girl child would get this quarter is 0.69%.


Historically, the government has allowed a higher interest rate than the formula rate, as a social good.

The currently available rates are significantly on the higher side and it is advisable that people take advantage of these rates.

The next review is due on June 30. In case the rates are revised downwards, it is advisable to lock in at the currently available rates, where applicable, by June 30.

In certain instances, like the Public Provident Fund, when the rate is revised downwards, it is on the entire amount, including your earlier deposits. Hence, there is no opportunity to lock in here.

In contrast, there are certain contractual return avenues e.g. National Savings Certificate (NSC), Kisan Vikas Patra (KVP), Term Deposits, etc. where you can lock in at the current rates.

As and when the rates are revised downwards, only the new investments will be at the lower rates.

(Data source: RBI Monetary Policy report)

(The writer is a corporate trainer and author)

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