Market participants have often cited Small savings schemes interest rates as bottlenecks in transmission of rate cuts. To remove such inefficiencies, government had decided to calibrate the interest rates on these small savings schemes to G-sec yields of corresponding maturities. This calibration is done by finance ministry on a quarterly basis and yields are revised accordingly. However, even though over the last quarter the yields on the government securities have fallen by 50-80 bps across maturities, government has decided to keep the interest rates unchanged for all the savings schemes for the July-September quarter. This, at a time when banks have been slashing their FD rates, has rendered these schemes perhaps the best fixed income option for investors.
|Scheme Name||Compounding Frequency||Apr-Jun 20 rates||Present rates|
|1 year time deposit||Quarterly||5.5||5.5|
|2 year time deposit||Quarterly||5.5||5.5|
|3 year time deposit||Quarterly||5.5||5.5|
|5 year time deposit||Quarterly||6.7||6.7|
|5 year recurring deposit||Quarterly||5.8||5.8|
|Senior citizen savings scheme||Quarterly and paid||7.4||7.4|
|Monthly income account||Monthly and paid||6.6||6.6|
|National Savings Certificate||Annually||6.8||6.8|
|Public Provident fund||Annually||7.1||7.1|
|Kisan Vikas Patra||Annually||6.9||6.9|
|Sukanya Samriddhi Account||Annually||7.6||7.6|
As can be seen in below graph, the difference between market rates (measured as bond yields or SBI FD rate) and Small Savings Scheme rates reached its peak in Q4 of FY 20. For instance, the difference between 5 year Savings time deposit rate and similar tenor SBI FD rate was close to 150 bps. This was corrected by government by slashing rates across schemes by 80-150 bps in the beginning of this financial year. However, subsequently the FD rates and bond yields have further fallen by almost 50 bps thereby again widening the arbitrage offered by small savings schemes. The difference between 5 year FD under National Savings time deposit and SBI has again reached almost 150 bps.
The difference between long term rates, for instance between PPF and 10 year G Sec rates, is also at a peak of 130 bps. The same figure was almost zero for most part of 2018.
Investors incrementally deployed almost 1.25 lakh crore in FY 2020 in these schemes. Break up of overall outstanding( 10.4 lakh Cr) in these schemes as on February end is given below.
Table depicting movement of interest rates across fixed income options
|Scheme||Jul-Sep 18||Oct-Dec 18||Jan-Mar 19||Apr-Jun 19||Jul-Sep 19||Oct-Dec 19||Jan-Mar 20||Apr-Jun 20||Jul-Sep 20|
|1 year time deposit||6.6||6.9||7||7||6.9||6.9||6.9||5.5||5.5|
|2 year time deposit||6.7||7||7||7||6.9||6.9||6.9||5.5||5.5|
|3 year time deposit||6.9||7.2||7||7||6.9||6.9||6.9||5.5||5.5|
|5 year time deposit||7.4||7.8||7.8||7.8||7.7||7.7||7.7||6.7||6.7|
|5 year recurring deposit||6.9||7.3||7.3||7.3||7.2||7.2||7.2||5.8||5.8|
|Senior citizen savings scheme||8.3||8.7||8.7||8.7||8.6||8.6||8.6||7.4||7.4|
|Monthly income account||7.3||7.7||7.7||7.7||7.6||7.6||7.6||6.6||6.6|
|National Savings Certificate||7.6||8||8||8||7.9||7.9||7.9||6.8||6.8|
|Public Provident fund||7.6||8||8||8||7.9||7.9||7.9||7.1||7.1|
|Kisan Vikas Patra||7.3||7.7||7.7||7.7||7.6||7.6||7.6||6.9||6.9|
|Sukanya Samriddhi Account||8.1||8.5||8.5||8.5||8.4||8.4||8.4||7.6||7.6|
|One year bond yields||7.2||7.7||6.8||6.4||6.2||5.7||5.5||4.6||3.7|
|Ten year bond yields||7.9||8||7.4||7.3||6.9||6.7||6.5||6.3||5.8|