Interest on PPF, NSC, other small savings schemes may come down soon

• Interest rate on small savings schemes for April to June quarter will be announced this month-end
• Rates on small savings schemes, including PPF, are revised on quarterly basis

The government is considering a cut in interest rate on small savings schemes like Post Office deposits, Public Provident Fund (PPF), National Savings Certificate (NSC), and Senior Citizen Savings Scheme, Press Trust of India reported, citing sources. Interest rate on small savings schemes for April to June quarter will be announced this month-end.

Despite a moderation of overall interest rate in the financial system, the government kept interest rate on small savings schemes steady for the January to March quarter. Bankers have been complaining that high rates on small savings schemes prohibit them from cutting deposit rates aggressively even though India's biggest bank State Bank of India has cut fixed deposit rates aggressively this quarter. For example, currently five-year SBI fixed deposit fetches just 5.9%.

Rates on small savings schemes are revised on quarterly basis. Currently, PPF and NSC fetch interest rate of 7.9%. The 5-year Senior Citizens Savings Scheme currently offer an interest rate of 8.6% while post office savings deposits fetch 4%.

SBI had recently lowered interest rate on retail deposits to 3% from 3.25% earlier.

The girl child savings scheme Sukanya Samriddhi Account fetches 8.4% (compounded annually).

Since April 2016, interest rates on small saving schemes are being revised on a quarterly basis. However, the formula for fixing small savings rates based on comparable yields on government securities, as recommended by Shyamala Gopinath committee, has however not been strictly followed in some quarters.

"Had the government followed the formulas strictly, rates on different small savings instruments would now have been lower by 80-160 bps," SBI Research said in a recent note. If the government had strictly followed the formula, PPF would have fetched around 7% this quarter, instead of current level of 7.9%.