Monday, June 21, 2021

GOVERNMENT CUTS INTEREST RATE ON SMALL SAVING SCHEME: WHY IT MATTERS?

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When the country was facing a severe pandemic and, people were finding ways to increase their income. The government’s declaration to cut interest rates on various small savings schemes from April 1, 2020, has become a brutal trauma for the investors. 

The government has taken a huge choice to cut down the interest rates on different small savings schemes like Kisan Vikas Patra, public provident fund, and Sukanya Samriddhi. The interest rates cut are ranging from 70 to 140 bps (100 BPS makes one percentage of interest) for the April-June quarter for the financial year 2020-21.

The moderation in interest rates means that these investments would earn the lowest returns for the year.

Recent changes in interest rates by the government:

  • The interest charge on the savings deposit was the same as earlier, which is 4 percent.
  • PPF scheme was down by 80 bps (7.1 percent), earlier it was 7.9 percentages.
  • The interest rate on NSC is down to 6.8 percent against 7.9 percent earlier.
  • KVP changes at 6.9 percent against 7.6 percent earlier.
  • The interest rates on five senior citizen savings schemes have also been down by 120 basis points, 7.4 percent from 8.6 percent earlier.
  • The Sukanya Samriddhi Scheme interest rate has fallen to 7.4 percent from the previous 8.4 percent with a 1 percent interest rate cut.

REASON FOR CUTTING DOWN THE INTEREST RATES:

 The modification in the interest charges is a part of the quarterly analysis exercise that the government always follows. The changes are made due to the fluctuations in yields on government securities.

The rate cut was not on time, as the Government kept them for review in the first quarter of the year despite numerous changes in yields. But the Reserve Bank of India’s 75 bps cut in repo rate (the rate at which RBI gives money to banks) has triggered the government to change the interest rates of the various saving scheme.

Though, these rates cut will have an impact on the current PPF accounts only. The other saving schemes having existing accounts would not get any obstacle by this decision of the government. Yet, those who want to start new accounts will get new interest rates only.

Due to recent changes in interest rate, financial expert suggests that the people who are dependent on the small saving schemes should revisit their portfolio. There are several hybrid funds that you can consider. And also, you should keep an eye on your risk profile to avoid any uncertainty.

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