Bad news for investors!!!
The Government of India has cut the interest rate on various small savings schemes. High interest rates for the small savings schemes including Public Provident Fund (PPF) had been cited by banks as the reason for not cutting interest rates in tandem with interest rate cuts from RBI.
Their refrain was they cannot reduce interest rates on deposits as they would lose out to competition from post office schemes. Now that the interest rates on small savings schemes have been cut, you can expect banks to cut deposit rates and hopefully lending rates too.
Here are the revised rates for various schemes.
- Public Provident Fund: Cut from 8.7% p.a. to 8.1% p.a.
- Sukanya Samriddhi Scheme: Cut from 9.2% p.a. to 8.6% p.a.
- National Savings Certificate: Cut from 8.5% p.a. to 8.1% p.a.
- Kisan Vikas Patra: Cut from 8.7% p.a. to 7.8% p.a.
- Post Office 5-year Monthly Income Scheme (POMIS): 8.4% p.a. to 7.8% p.a.
- 5 year Recurring Deposit: 8.4% p.a. to 7.4% p.a.
- 1-year Post Office Time Deposit: Cut from 8.4% p.a. to 7.1% p.a.
- 2-year Post Office Time Deposit: Cut from 8.4% p.a. to 7.2% p.a.
- 3-year Post Office Time Deposit: Cut from 8.4% p.a. to 7.4% p.a.
- 5-year Post Office Time Deposit: Cut from 8.5% p.a. to 7.9% p.a.
- Senior Citizen Savings Scheme: Cut from 9.3% p.a. to 8.6% p.a.
You can read the Government Notification here.
These rates are applicable from first quarter of FY2017. Do note these rates are subject to revision every quarter. Additionally, for existing time deposits, NSC, KVP and SCSS account, you will get the old interest rate only (contracted at the time of opening he account). Only the new deposits will be opened at the lower rates.
For PPF and SSY, the interest rate on the corpus will go down from next year.
Unlike EPF tax proposal which was rolled back, I do not see much chances of these rate cuts being rolled back. According to banks, high interest rates in small savings schemes were preventing them to pass RBI rate cuts to their customers. With the rates being cut sharply, let’s hope the banks return the favour by lowering interest rates.
I understand this rate cut comes as a shock to many fixed income investors. However, this also highlights the importance of diversification in your portfolio.