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Govt hikes interest rate on 5-year recurring deposit scheme to 6.7%

Small savings schemes are government-backed investment options that offer guaranteed returns. The interest rates on small savings schemes are reviewed every quarter

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The government has increased the interest rate on the five-year recurring deposit scheme by 20 basis points to 6.7 per cent for the October-December quarter of the current financial year while keeping all other small savings rates unchanged.

The interest rate on the senior citizen scheme has remained at 8.2 per cent, which is the highest among all small savings schemes. Senior citizens who are residents of India can invest a lump sum in the scheme, individually or jointly, and get access to regular income along with tax benefits.

Similarly, the interest rate on savings deposit has been retained at 4 per cent, and on the one-year term deposit at 6.9 per cent.
 

Experts said small savings interest rates were often linked to the yields on government securities (G-secs). “G-sec yields have been stable in the last three months, which could be the possible reason why the government could have kept the interest rate of these schemes unchanged,” said Madan Sabnavis, chief economist at Bank of Baroda.

Small savings schemes are government-backed investment options that offer guaranteed returns. The interest rates on small savings schemes are reviewed every quarter.

The Reserve Bank of India (RBI) data recently showed that the household net financial savings rate was at its lowest in decades, standing at 5.1 per cent of gross domestic product (GDP) in 2022-23 (FY23), compared to 7.2 per cent of GDP in 2021-22 (FY22). The finance ministry had clarified that the household sector was not in distress and that they were purchasing vehicles and homes on mortgages.

“Households might prefer these government savings schemes as they are marginally better than banks... Interest rates on the small savings schemes may remain the same, given the political economy as the elections are coming. An increase, however, is possible if G-sec yields improve,” Sabnavis added.

The interest rates on schemes such as the Public Provident Fund (PPF), Kisan Vikas Patra (KVP), and Sukanya Samriddhi Account Scheme (SSAS) have remained unchanged. The interest rate for the monthly income account scheme is 7.4 per cent, while it is 7.7 per cent for the National Savings Certificate and 7.1 per cent for PPF.

The surge in net collections from small savings so far this year has raised expectations of reduced dependence on market borrowings by the Centre. For the first quarter of the current financial year, the net collections under the small savings fund have witnessed a growth of over 48 per cent compared to the corresponding period last year, during which the increase was around 9.9 per cent.


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First Published: Sep 29 2023 | 8:56 PM IST

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