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Home Articles Government Hikes PPF and NSC Interest Rate to 8%

Government Hikes PPF and NSC Interest Rate to 8%

IndianMoney.com Research Team | Posted On Friday, September 21,2018, 06:56 PM

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Government Hikes PPF and NSC Interest Rate to 8%

 

 

Small saving schemes are launched by the Government to encourage savings and investments.  According to the circular issued by the Finance Ministry on 19th September, the interest rates on various small saving schemes have been hiked by 30 to 40 basis points (bps) for the third quarter. This is effective October 1st 2018.

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Government Hikes PPF and NSC Interest Rate to 8%

In this article you will learn why interest rates have been hiked and its implications on investors.

Following are the essentials of an interest rate hike:

Note: Interest rates on the post office savings account remains unchanged at 4%.

Is it a good time to invest in small savings schemes?

  • Small savings schemes interest rates are reviewed each quarter.
  • As small savings schemes interest rates are benchmarked to government bond yields; it is difficult to predict the trend of interest rates.
  • It is advisable that investors looking to invest a lump sum or monthly surpluses, don’t delay investing in small savings schemes in anticipation of further rate hikes. A delay will cost you an opportunity of earning higher interest rates, right now.

What triggered the hike in interest rates?

  • After demonetization, a lot of money flowed into CASA (current accounts and savings accounts), which are low-cost deposits. Banks then reduced the interest rates on fixed deposits (FDs).
  • Investors wanting to earn higher interests, responded by diverting investments towards small saving schemes, which offered a higher interest rate.
  • The Government subsequently reduced small savings interest rates.
  • Investors shifted money to mutual funds, with the hope of earning higher returns.
  • Now, petrol and diesel prices are increasing, fueling inflation. USA vs China trade wars, have made imports costly.
  • To curb inflation, RBI increased the repo rate by 0.50 bps in the last two bi-monthly monetary policy review meets.
  • Any increase or decrease in the repo rate is reflected directly in the overall interest rates. Banks hiked MCLR on home loans which made home loans costly. Banks also hiked FD rates.
  • A hike in interest rates was long awaited because small savings scheme are benchmarked against government bond yields of the same maturity.
  • The Shyamala Gopinath Committee had suggested that savings scheme interest rates should be 25 to 100 bps higher than that of the government bonds yields of similar maturity.

SEE ALSO: Home Equity Loan: Benefits, Working Process and Calculation

Who benefits from an interest rate hike?

  • Risk-averse investors: Small savings schemes are quite secure.
  • Investors who invest in fixed-income securities: Small savings schemes have Sovereign backing and are a very safe investment.
  • Senior citizens: Investors in SCSS (Senior Citizens Saving Schemes). The interest rate is compounded quarterly. Also, it is higher than the fixed deposit interest rates at 8.7% for the October to December quarter.
  • Individuals planning their retirement: Small savings schemes offer safety of capital and assured returns, which can be a good part of the retirement portfolio.
  • Investors in fixed deposits: Increase in small saving scheme rates will force the banks to increase interest rates on FDs.

Why invest in small savings schemes?

  • Small savings schemes offer guaranteed returns.
  • These are less risky compared to mutual funds.
  • These are tax-efficient. Schemes like PPF enjoy EEE tax benefits. Others like SCSS offer high returns vis-à-vis FDs.

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