Small Saving schemes such as Public Provident Fund (PPF) and National Savings Certificates (NSC) play a crucial role in your financial planning. Historically they have been a dependable source of fixed income. While some of small savings schemes offer additional benefits such as tax savings, opportunity to earn compounded returns and so on; they all have so far been offering some or the other additional incentive to investors in order to inculcate the habit of saving among them.

However, now the income from such small savings scheme is set to become more volatile. Following the recommendations of Shyamala Gopinath Committee, the interest rate on small savings schemes too would be linked to market rates and interest rates would be accordingly revised prior to beginning of a financial year hereon. As a result, rates for FY 2013-14 would be revised from April 1, 2013.
 

Revision of Interest rates on Small Savings Schemes

Scheme	Interest Rates for FY 2012-13	Interest Rates for FY 2013-14	Action wef. April 1,2013
Savings Deposits	4.0%	4.0%	Unchanged
1 Year Time Deposit	8.2%	8.2%	Unchanged
2 Year Time Deposit	8.3%	8.2%	Lowered by 0.10%
3 Year Time Deposit	8.4%	8.3%	Lowered by 0.10%
5 Year Time Deposit	8.5%	8.4%	Lowered by 0.10%
5 Year Recurring Deposit	8.4%	8.3%	Lowered by 0.10%
5 Year Senior Citizen's Savings Scheme	9.3%	9.2%	Lowered by 0.10%
5 Year Monthly Income Scheme	8.5%	8.4%	Lowered by 0.10%
5 Year National Savings Certificate	8.6%	8.5%	Lowered by 0.10%
10 year National Savings Certificate	8.9%	8.8%	Lowered by 0.10%
Public Provident Fund	8.8%	8.7%	Lowered by 0.10%

(Source: Finance Ministry)  

As depicted in the table above, interest paid to you on balance in your savings account would remain unchanged along with that on a deposit made for the duration of 1 year. However, deposits with a maturity profile of 2 years and above would fetch you 0.10% lower returns in the coming fiscal. The new rates, however, wouldn’t be applicable with retrospective effect on time deposits. Planning commission has backed the recommendation of lowering interest rates pointing a need of allowing monetary transition. This in other words means, if creditors are expected to get cheaper loans; depositors too have to settle for lower rates on their deposits. RBI has recently lowered the policy rates by 0.25% and WPI inflation also has fallen below 7%. Therefore, even after the revision in interest rates, investors would earn real positive returns.

In our View this is a welcome move provided it is linked to appropriate macroeconomic variables. We believe that when inflation is still about 10% at consumers’ level, a reduction in interest rate following a fall in WPI inflation would not generate real positive returns. However, this may fetch real benefits to government almost instantaneously. The government has been battling to curb its fiscal deficit for a last few years and even a small reduction of 0.1% would result in meaningful savings to the government.

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