Senior Citizen Savings Scheme, Post office time deposits, NSC interest rates hiked by up to 110 bps for March quarter

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The government has hiked the interest rates of a few small savings schemes by between 20 bps and 110 bps for the January-March 2023 quarter. The finance ministry made this announcement via a circular issued on December 30 2022. (One percentage point is equivalent to 100 basis points.) The interest rates of schemes like the Senior Citizen Savings Scheme, Monthly Income Savings Scheme, National Savings Certificate, Kisan Vikas Patra, and all post office time deposits have been hiked.
However, interest rates of the Public Provident Fund, Sukanya Samriddhi Yojana have not been changed for this quarter as well.

Here is a look at the interest rates on various small savings schemes for the fourth quarter of FY 2022-23.

Source: Finance ministry circular

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.

Last time interest rates were hiked

After close to four years, the government in the previous quarter had increased the interest rates of certain small savings schemes. The interest rates of three small saving schemes have been hiked by 10 bps to 30 bps for the October-December 2022 quarter.

Interest rate of Senior Citizen Savings Scheme was hiked by 20 bps to 7.6% and Kisan Vikas Patra by 1o bps to 7%. The interest rate of post office time deposit with a tenure of 3 years was raised by 30 bps to 5.8% and 2-year tenure by 20 bps to 5.7%. Interest rates of rest of the small savings schemes like PPF and Sukanya Samriddhi Yojana were kept unchanged.

The latest interest rate hike (i.e., for the January-March quarter) 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. Now that bond yields have risen sharply, small savings rates have been revised upwards.
Will rates be hiked in April 2023

As inflation has already shown signs of cooling and if this trend continues, we may not see a significant hike in next quarter also. However, if the inflation trend reverses upward or remains sticky at higher level then interest rates may be hiked in March also.

Fixed income investors: A happy lot

The Reserve Bank of India (RBI) has been increasing key rates since May 2022. 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 7 days-10-year tenors, as on December 19, 2022, earn 3 percent to 6.75 percent. Senior citizens, who earn 0.5 percent more, will get 3.5 percent to 7.25 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.

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