Interest rates on small savings schemes like Public Provident Fund (PPF) and Sukanya Samriddhi Yojana (SSY) have seen an upward trend in recent years, offering attractive returns for investors. However, experts now predict that this trend may reverse, with possible rate cuts in the coming months. The combination of domestic and global factors, such as falling inflation and the US Federal Reserve’s interest rate cuts, could lead to a drop in rates over the next 6 to 12 months.
For now, the interest rate on Sukanya Samriddhi stands at 8.2%, while PPF offers 7.1%. With new interest rates set to be announced by the end of September, many are wondering whether the current rates will remain or take a dip in the October-December quarter.
What Determines Interest Rates on Small Savings Schemes?
The interest rates on schemes like PPF, SSY, National Savings Certificate (NSC), and Senior Citizen Savings Scheme (SCSS) are revised every quarter by the government. These rates are largely influenced by the 10-year government bond yield. The interest rates are linked to the average bond yield over the past three months, with PPF’s rate being 0.25% higher than the bond yield.
For example, from June to August 2023, the 10-year bond yield averaged 6.93%, which should technically push PPF’s rate to 7.18% based on the government’s formula. However, experts feel the government is unlikely to raise the PPF rate in the upcoming quarter. Instead, the rates may remain unchanged or could even drop in the near future, especially considering the global trend of falling interest rates.
Why Are Experts Predicting a Drop in Interest Rates?
The main reason behind the apprehension of a drop in small savings scheme rates is the recent US Federal Reserve’s decision to cut interest rates by 0.50%. Globally, central banks are beginning to ease monetary policies, and India may soon follow suit.
As Nirav R Karkera, head of research at Fisdom, explains, “We are nearing the end of the interest rate hike cycle. The Reserve Bank of India (RBI) is keeping an eye on domestic factors like inflation before making any major changes. Although central banks in other countries have started cutting rates, India is in no rush to do so.”
Karkera adds that while the rates may not drop sharply anytime soon, the phase of rate softening is certainly on the horizon. Once inflation is under control, the RBI may adopt a more relaxed stance, possibly leading to rate cuts for both policy rates and small savings schemes.
When Could Interest Rates Start to Fall?
According to S Sreedharan, Founder and CEO of Wallet Wealth LLP, the reduction in interest rates could begin within the next 6 to 12 months. He points out that the US Federal Reserve’s recent rate cuts signal the beginning of a global interest rate decline, and India is likely to follow this trend in the long term.
Once the RBI starts easing its monetary policy, interest rates on small savings schemes such as PPF, SSY, and SCSS are expected to fall. However, Sreedharan emphasizes that the rate cuts will not be drastic but rather gradual as the RBI carefully monitors inflation and other domestic economic indicators.
Current Trends: Have Interest Rates Peaked?
The interest rates on small savings schemes have already seen significant hikes in recent quarters. Since April-June 2020, the government has increased the rates on most schemes by 0.40% to 1.50%. In contrast, PPF has remained at 7.1% since that time, while other schemes have seen slight upward adjustments.
Despite these hikes, the interest rates are now closer to the levels suggested by the Shyamala Gopinath Committee, which formulated the guidelines for small savings schemes. Given that the rates are already aligned with the committee’s recommendations, the likelihood of further increases seems minimal.
What Should Investors Do?
With the possibility of rate cuts looming, what should investors do to secure good returns?
Experts suggest locking in current rates by investing in small savings schemes now, rather than waiting for future rate hikes. According to Karkera, “Investors should take advantage of the current interest rates, as there is a chance that rates will soften in the coming quarters.”
By locking in rates at 7.1% for PPF and 8.2% for Sukanya Samriddhi, investors can secure steady and predictable returns for the long term. Since these schemes offer tax-free returns and long-term financial security, they are attractive options for risk-averse investors.
Another key strategy is to diversify your investments across multiple schemes. By investing in a mix of short-term and long-term plans, such as SCSS or NSC, investors can balance the risk of future rate cuts while maintaining stable returns. Diversification ensures that even if one scheme’s rate drops, the overall impact on your portfolio remains minimal.
What Lies Ahead?
The next few quarters will be crucial in determining the direction of interest rates for small savings schemes. While the RBI is expected to take a cautious approach, the pressure to align with global trends could eventually lead to rate cuts.
For now, investors should focus on making the most of the current rates and securing their long-term financial goals through stable, government-backed schemes.
