The RBI hiked the repo rate by 25 basis points in its bi-monthly policy review. The repo rate was hiked from 6 to 6.25%. The aim of this was to control the rising inflation in the economy.
Retail Inflation measured by the Consumer Price Index (CPI) was 4.58% for the month of April. It has risen to 4.87% for the month of May. RBI had to hike the repo rates to control inflation in the economy.
Many leading banks hiked deposit rates offered on fixed deposits, and many citizens especially senior citizens expected the Government to hike interest rates on small saving schemes. But, there’s bad news for investors in small savings schemes like PPF, Post Office Monthly Income Scheme (POMIS), NSC and so on.
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The Government has not changed interest rates offered on small saving schemes like PPF, NSC, POMIS and so on, for the July-September quarter. Investors in small saving schemes were eagerly waiting for the Government to hike interest rates.
The interest rates on small saving schemes are set with reference to yields of government bonds of the same maturity. The interest rates on these schemes are calculated by adding a spread to the average yield of government bonds in the preceding quarter.
According to suggestions given by the Shyamala Gopinath Committee, interest rates on such schemes should be 25-100 basis points higher than the yields of Government Securities of similar maturity. Also, the committee has suggested, revision of interest rates on an annual basis. The government, however, thought it fit to review the interest rates every quarter. Government Bond rates have been rising in recent times.
Based on the suggestions of the committee, benchmarked government yield and increasing trend in the G-Sec yields, investors expected a hike in the interest rates of small savings schemes. Ideally, the interest rate applicable on small saving schemes for this quarter, i.e., 1st July 2018 to 30th September 2018, should have been higher than 7.6%. On the contrary, the rate remains same at 7.6%.
SEE ALSO: 12 Things To Know Before Opening PPF
In an economic scenario of rising interest rates, the borrowing costs of the government does increase. This is because they will have to pay a higher rate of interest on public deposits. While such a situation is beneficial to the investors, the economy is at loss. A higher rate of interest causes economic slowdown. Wonder why? It is simple. The government will end up paying huge amounts towards interest on deposits. Thus, it will not have enough funds to invest in development projects or infrastructure. This causes an overall slowdown in the economy.
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