In the recent times, low interest rates, moderate inflation has put a debt investor’s real rate of return under pressure. So retail investors will welcome the recent announcement by Ministry of Finance, Department of Economic Affairs to increase interest rates.
On September 19, in their quarterly interest rates circular, the finance ministry has hiked rates of Public Provident Fund Scheme (PPF), Senior Citizen Savings Scheme (SCSS), National Savings Certificates (NSC), Post Office Monthly Income Scheme Account (MIS), Sukanya Samriddhi Yojana (SSY), Post Office Recurring Deposit Account (RD) and Kisan Vikas Patra (KVP) by 0.4%.
This will take the PPF and NSC interest to 8%, MIS interest to 7.7%, SSY interest to 8.5% and SCSS interest to 8.7%.
In addition, government has hiked interest on Post Office Savings Deposit Account by 0.3-0.4% depending on the tenure.
However, the interest rate offered by Post Office Savings Account remained unchanged at 4%.
Overview of interest rate change in small savings schemes
Source: Ministry of Finance, Department of Economic Affairs
In 2011, government linked interest rates of small savings schemes to market (government bond yields of similar maturity). Initially, the government revised these rates annually. However, in 2016, the ministry increased the frequency of revisions from annually to quarterly.
As the last few months saw RBI hiking repo rates twice totalling 0.5% and a steady rise in Government bond yields, market participants had anticipated this increase in rates.