The recent news has been flooded with the government’s decision to maintain steady interest rates on Small Savings Schemes, including NSC (National Savings Certificate) and PPF (Public Provident Fund), for the second quarter of 2022-23. This move comes amidst a period of high inflation and escalating interest rates. Surprisingly, the interest rate connected to small savings schemes has not undergone any changes since the inaugural quarter of 2020-21. Contrary to expectations, there was no hike in interest rate despite a spike in the yield of government bonds which these returns are tied to according to a predetermined formula.
Understanding Small Saving Schemes
Small Saving Schemes or instruments play a pivotal role in driving household savings in India. They consist of 12 different instruments and offer investors a guaranteed interest on their investments. Monies collected through various small savings instruments are attributed to the National Small Savings Fund (NSSF). In light of the Covid-19 pandemic, small savings have surged ahead as a cardinal source of providing finances to the government deficit, resulting in an increased requirement for borrowings.
Classification of Small Savings Instruments
One can organize small savings instruments into three distinct categories: Postal Deposits, Savings Certificates, and Social Security Schemes.
Postal Deposits include savings accounts, recurring deposits, time deposits of varying maturities, and the monthly income scheme. Next are Savings Certificates, which are comprised of the National Small Savings Certificate (NSC) and Kisan Vikas Patra (KVP). Lastly, Social Security Schemes cover the Sukanya Samriddhi Scheme, Public Provident Fund (PPF), and the Senior Citizens’ Savings Scheme (SCSS).
Interest Rate Determination in Small Savings Schemes
Interest rates applicable to small savings schemes are realigned on a quarterly basis and mirror the trends observed in benchmark government bonds of a similar maturity period. These rates are examined periodically by the Ministry of Finance. In 2010, the Shyamala Gopinath panel was constituted to review the Small Saving Scheme and it suggested a market-linked interest rate system for small savings schemes.
Understanding these small savings schemes and their workings is crucial in today’s financial climate, especially with the government’s recent decision to maintain a steady interest rate amidst rising inflation and interest rates. Every investor must equip themselves with this knowledge to make informed investment decisions and secure their financial future.
