In the upcoming rate review on September 30, there is considerable speculation that the government may eventually raise interest rates on modest savings plans including Public Provident Fund (PPF), Sukanya Samriddhi Savings Scheme, Senior Citizen Savings Scheme (SCSS), and National Savings Scheme (NCS).
Notably, the yields on government bonds, often known as government securities or G-sec, are used to determine the interest rates on these savings. Every three months, the government evaluates these interest rates in light of the average g-sec yields for the previous three months.
Since April 2022, the benchmark 10-year yield has been over 7%, and from June to August 2021, it averaged 7.31%, providing compelling evidence for a rate increase in the forthcoming review.
According to a formula for calculating PPF interest that the Finance Ministry announced on March 18, 2016, PPF interest might rise to 7.56% in the quarter between October and December.
The 3-month G-sec yield is 25 basis points lower than the PPF interest rate. The PPF now offers 7.1%.
Similar to this, the Sukanya Samriddhi Savings Scheme's interest rate, which is now 7.6%, should be 75 basis points higher than the G-sec return. The Senior Citizen Scheme's interest rate is 100 basis points more than the three-month average G-sec yield.
In practice, though, the government adjusts the interest rates based on the above formulae much later. Small savings plan interest rates haven't changed since September 2020; the most recent limiting was during the quarter from April to September 2020. The interest rates for small schemes may be increased now that bond yields have been high for a while.
The Reserve Bank of India claims that small savings plans are evaluated every quarter at a spread between 0 and 100 basis points and above G-sec rates of comparable maturities and are delayed to G-sec market yields.
