What does the unchanged small savings rates mean?
- July 2, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
What does the unchanged small savings rates mean?
Subject : Economy
Section: Monetary Policy
Why in the news?
The government said that it had decided to keep interest rates on small savings instruments unchanged for the July-September quarter.
Details:
- Schemes like Public Provident Fund (PPF) and the National Savings Certificate (NSC) will continue to carry an annual interest rate of 7.1% and 6.8%, respectively.
- The one-year term deposit scheme will continue to earn 5.5% interest.
- Term Deposits of one to five years will fetch a rate in the range of 5.5-6.7%, to be paid quarterly, while five-year recurring deposits will earn higher interest of 5.8%.
- Small savings rates are linked to yields on benchmark government bonds, but despite the upward movement in G-Sec yields, the government has not increased interest rates
Impact?
- Negative real rate of return for small savers and pensioners- Barring PPF and Sukanya Samriddhi Yojana, all other small saving instruments are currently fetching negative real returns amid high inflation.
- Banks reduce deposit rate- as small saving instruments are competitive instruments to bank deposits, a lower interest rate on small savings instruments would also cause decline in deposit rates of banks.
- Reduce investment-Technically, negative real rates discourage savings and boost consumption. This, in turn, may fuel more inflation and lead to even more negative real rates.
Small saving instruments The interest rate on small savings instruments is reset every quarter, based on market yields on government securities (G-secs) with a lag, at a spread ranging from 0-100 basis points over and above yields of comparable maturities. However, political factors also influence the rate change. The Shyamala Gopinath panel (2010) constituted on the Small Saving Scheme had suggested a market-linked interest rate system for small savings schemes. Small Savings Schemes are a set of savings instruments managed by the central government with an aim to encourage citizens to save regularly irrespective of their age. They are popular as they not only provide returns that are generally higher than bank fixed deposits but also come with a sovereign guarantee and tax benefits. All deposits received under various small savings schemes are pooled in the National Small Savings Fund. The money in the fund is used by the central government to finance its fiscal deficit. Types They are of two types viz fixed-rate products and variable products.
The schemes can be grouped under three heads – Post office deposits, savings certificates and social security schemes.
NSCs are available in 2 fixed maturity periods – 5 years and 10 years. There is no maximum limit on the purchase of NSCs, but only investments of up to Rs 1.5 lakh can entitle you a tax exemption under Section 80C of the Income Tax Act, 1961. o The Kisan Vikas Patra, which is open to everyone, doubles the one-time investment at the end of 124 months signifying a return of 6.9% compounded annually. The minimum investment amount is Rs 1000 while there is no upper limit.
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