Govt hikes interest rates on most small savings schemes by up to 70 bps

The government on Friday jacked up interest rates on most small saving schemes for the April-June 2023 quarter, with National Savings Certificate (NSC) emerging as an attractive option with a return of 7.7 per cent, up from 7 per cent.

In all, the government has raised interest rates on 10 small savings schemes for April 1 to June 30, 2023 period.

The interest rate for senior citizens savings scheme was hiked to 8.2 per cent, up from 8 per cent. The government also notified increasing the deposit limits to Rs 30 lakh from Rs 15 lakh under the senior citizens’ savings scheme and to Rs 9 lakh from 4.5 lakh under the national savings (Monthly Income Account) scheme.

For joint accounts, the limit under the NSS will be Rs 15 lakh instead of Rs 9 lakh at present. The finance ministry also notified the Mahila Samman Savings Certificate announced in the FY24 budget, with a deposit limit of Rs 2 lakh. The scheme will offer a fixed interest of 7.5 per cent for two years with a partial withdrawal option.

The Union Finance Ministry, however, kept the Public Provident Fund (PPF) rate unchanged at 7.1 per cent.

The government has increased interest rates for one, two, three, and five-year deposits. For one-year deposit, it was raised by 20 bps to 6.8 per cent. For the two-year, it has been made 6.9 per cent. For three-year deposit it is now 7 per cent, a hike of 10 bps.

On 5-year deposit and recurring deposit, it was raised to 7.5 per cent and 6.2 percent respectively.

Aditi Nayar, Chief Economist at ICRA, said, “As expected, small savings interest rates have been hiked by 10-70 bps across various instruments. This should help garner steady deposits in the coming quarter, in light of the expected rate hike from the MPC in April 2023, which would subsequently get transmitted to bank deposit rates.”

Among the other key government-backed savings instruments, interest rate on Kisan Vikas Patra was raised to 7.5 per cent, from the earlier 7.2 per cent. The government also reduced the maturity period for this instrument to 115 months from the earlier 120 months.

Effective interest rate on Sukanya Samriddhi Scheme now stands at 8 per cent, after a raise of 40 bps. Interest rate on Monthly Income Account Scheme has been raised to 7.4 per cent, Kisan Vikas Patra to 7.5 per cent.

However, the government kept the interest rates unchanged on savings deposit and public provident fund scheme at 4 per cent and 7.7 per cent respectively for the June quarter.

This is the third consecutive interest rate hike on small savings schemes in the last nine months. Before that, there was a freeze in interest rate hike starting January 2019. On 30th of December, the government had increased interest rates in eight of 12 schemes for the March quarter.

After RBI raised concerns about limited transmission of its policy rate cuts, the Finance Ministry started quarterly reviews of small savings rates, beginning 1 April 2016, making the process more dynamic and market-linked.

Deepesh Raghaw, founder, Personal Finance Plan, a Securities and Exchange Board of India-registered investment advisor, said the increase in small savings rates is to bring the rates at par with bank fixed deposits.

“Every investor compares the return of small savings against the fixed deposits (FDs) offered by banks. The PPF has been kept unchanged likely due to the exemption from taxation,” he added.

The Reserve Bank of India has increased its policy rate by 250 bps to 6.5 per cent in February to bring inflation within its tolerance band and curb capital outflow amid global tightening of monetary policy. This has resulted in higher interest rates charged by banks to consumers such as on home loans and personal loans. With credit growth remaining in double digits amid tight liquidity situations, banks have also increased deposit rates to garner more deposits.  

Major public sector banks such as Punjab National Bank, Canara Bank, State Bank of India, and Bank of India and private commercial banks such as HDFC Bank, ICICI Bank, Axis Bank, and Kotak Mahindra Bank also raised interest rates on their deposits post the RBI February hike in benchmark policy rates.