The interest rate on Public Provident Fund (PPF) may fall to a 37-year low soon.

And those on all other Small Savings Schemes (SSS) may also decline in next few days.

If…

The Government decides to reduce interest rates on SSS by 10 Basis Points (bps). One basis point is one-hundredth of a percentage.
 

Interest rates on SSS at present…

Small Savings Scheme	Interest rate
5-year National Savings Certificate (NSC)	7.8%
Senior Citizen Savings Scheme (5-year maturity)	8.3%
PPF	7.8%
Sukanya Samriddhi Yojana	8.3%
Kisan Vikas Patra	7.5%

(Source: India Post)

Historically, interest rates on SSS were shuffled only once a year. However, the Government changed this practice in the recent years when banks complained about deposits turning unattractive due to administered rates on SSS. So, the Government tried to ameliorate SSS rates with more market drive.

The strategy is likely to backfire on the Government if it decides to lower the interest rates even in Q3, FY 2017-18.

As you know, the Indian economy has recorded 5.7% growth in the Q1, FY 2017-18—the slowest pace since the present Government assumed office in 2014. The significant slowdown in the manufacturing sectors and poor performance of financial, insurance, real estate, and professional services sector has chiefly contributed to the muted GDP growth in Q1, FY 2017-18. Capital formation has also slowed down substantially in the last quarter.

On the other hand, retail inflation measured by the movement of Consumer Price Index (CPI) hovered at 3.36% in August. The RBI aims to maintain the retail inflation below 4% over the medium term. At 5.1%, credit growth in India fell to a 6-year low in FY 2016-17. Public Sector Banks (PSBs) continue to face the tremendous pressure of Non-Performing Assets (NPAs).

Demonetisation and the implementation of Goods and Services Tax (GST) have collectively hampered the economic performance. Private sector capex cycle hasn’t picked up yet. Simply because there’s no sign of a revival. As the credit demand is expected to remain lacklustre, banks are reluctant to raise deposits at higher rates. This has left investors with sparse choices to invest their hard earned money.

Conservative investors and retired people feel the heat when interest rates start to drop. Bothered about your retirement planning? Click here for quick help.

At present, the macroeconomic situation justifies lower interest rates, but to avoid the public wrath, the Government might prefer to keep interest rates on SSS unchanged this time.

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