The government has recently announced a hike in small savings interest rates by up to 1.1 percentage points for the January-March quarter. However, the same has been done only for term deposits, Senior Citizen Savings Scheme (SCSS), Monthly Income Scheme (MIS), National Savings Certificate (NSC) and Kisan Vikas Patra.

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However, rates for other schemes like Public Provident Fund (PPF) and Sukanya Samriddhi Yojana (SSY) haven't been changed. Consequently, the interest rates of the popular PPF and Sukanya Samriddhi Yojana will continue to be at 7.1 percent and 7.6 percent, respectively, in the January-March quarter of this fiscal.

Why so?

The main reason why PPF and SSY rates haven't been fiddled around is that they are tied to long-term trends and not the repo rate.

It is noteworthy, that the Indian central bank raised repo rate or short-term lending rate by 35 basis points earlier this month. This was the fifth consecutive rate hike after a 40 basis points increase in May and 50 basis points hike each in June, August and September. In all, the RBI has raised the benchmark rate by 2.25 percent since May this year.

"The PPF rates did not mirror the repo rate even when it went down during the pandemic, and so it is not necessary that the rates should go up now when the repo rate is hiked to pre-pandemic levels," said Adhil Shetty, CEO at BankBazaar.com while talking to CNBC-TV18.com.

Another reason, which Shetty thinks, is inflation.

He said that the long-term inflation has been above 4 percent for most of this financial year and is expected to remain so for some more time.

"So. an increase in PPF rates would mean higher real returns after accounting for inflation. This is not possible," Shetty said.

For other schemes, the rates have been rationalized to put them at par with the interest rates offered on bank fixed deposits (FDs) for similar tenors.

Small savings rates are recalculated every three months and are correlated with yields on bonds with the same maturity. The yields on bonds continued their downward trend during the course of 2020 and 21. Now that bond yields have skyrocketed, some small savings rates have been adjusted to a higher percentage.

How PPF rates have changed over the last 3 years?

Why do investors prefer small savings schemes?

Small savings schemes are considered a disciplined way of saving money, irrespective of age. The post office offers several such deposit schemes that come with a sovereign guarantee and tax benefits.

Apart from this, the government operates schemes such as the PPF via public sector banks. Currently, India Post or Department of Posts, which runs postal services in the country, offers nine types of small saving schemes.

Here are the interest rates offered by small savings schemes:

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First Published:Jan 2, 2023 4:24 PM IST