The importance of Small Savings Schemes

The Hindu

12-05-2025

Small Savings Schemes, kown as Post Office Savings Schemes, are a popular and useful means for people for channelising savings. Credit quality is top-notch as it is run by the government, and interest rates are competitive. Interest rates are fixed by the government every quarter e.g. the rates for the current quarter, April to June 2025, were announced on March 31. Today we will see, on what basis the rates are fixed by the government.
Basis for fixing rates
As per an old decision of the Government, the rate of interest on Small Savings Schemes will be aligned with Government Security (G-Sec) rates of similar maturity with a spread i.e. mark-up. As an example, the spread on Senior Citizens Savings Scheme will be 1% over comparable maturity G-Secs. The rationale for linking it to G-Sec yields in the secondary market is that it is in line with interest rate movements; G-Sec yield movements reflect actual and anticipated economic events pertaining to interest rate movement.
To clarify the concept, let us say the benchmark G-Sec rate is X% and the mark-up as per the formula is Y%. Hence, the rate should be X% plus Y%. However, if the rate is higher, say X% plus Y% plus Z%, then Z represents the generosity of the Government for the benefit of citizens. The rates on Small Savings Schemes are reviewed every quarter. However, rates are not revised downward every quarter even when G-Sec rates are sliding, which is the 'Z' referred earlier.
Prevailing rates
Post Office Savings Deposit rate is 4%. Public Provident Fund (PPF), which is a 15-year scheme (though it can be extended), is supposed to have a spread of 25 basis points (100 bps = 1%). The relevant G-Sec rate (the average of G-Sec of corresponding maturity from December 2024 to February 2025) relevant for the quarter April to June, was 6.85%. By that logic, PPF rate is (6.85 + 0.25= 7.1%) maintained now.
Post Office Term deposits of 1, 2 and 3-year maturity are to be at the corresponding G-Sec rate, without any markup. For a 5-year term deposit, the spread is 25 bps. Against the reference G-Sec yield of 6.62%, it should have been 6.87%. The rate for a 5-year TD is 7.5%. The excess interest is 0.63%. This 63 bps is the 'Z' referred earlier.
Kisan Vikas Patra (KVP) is at zero spread; with reference point at 6.85% and rate at 7.5%, the additional interest over formula is 0.65%.
For NSC VIII Issue, which is at a mark-up of 25 bps, formula rate is 7.04%. At 7.7%, the additional interest is 0.66%.
Senior Citizen Savings Scheme (SCSS), mentioned earlier, has the highest spread of 1% over reference G-Sec yield, as a social benevolence to take care of seniors, who may not have active income. At the reference 5-year G-Sec yield of 6.62%, the formula rate is 7.62%. The rate on offer is 8.2%, implying an additional interest (Z) of 0.58%.
Sukanya Samriddhi
The last is the Sukanya Samriddhi Account Scheme, which has the longest tenure of 21 years. The formula mark-up is 75 bps. The reference G-Sec yield is 6.85%. Against the formula rate of 7.6%, the rate is 8.2%. The additional interest a girl child would get this quarter is 0.6%.
Interest rates are coming down, as the Reserve Bank of India (RBI) has been reducing the reference repo rate.
The repo rate, which was 6.5% earlier, is at 6% now. It is expected that the RBI would cut the repo rate further. This is driven by lower inflation and economic growth being a little lower than earlier. Consequently, G-Sec yields have eased. As an example, 10-year maturity G-Sec, which was at 7.2% a year ago and 6.85% six months ago, is at 6.36% now.
The reference G-Sec yield levels mentioned earlier pertain to the period December 2024 to February 2025. Since then, G-Sec yields are lower. The implication is, when rates for next quarter viz. July to September are announced on June 30, the reference point will be lower.
Conclusion
We have mentioned earlier, there is a 'generosity component' or 'Z' component in the currently prevailing Small Savings rates. With the reference rate coming down, if the government maintains the current rates, the 'Z' component will be higher.
While it is possible it maintains current rates as there is a political implication of cutting it, pressure will be higher on government's finances.
Hence there is a possibility Small Savings rates may be reduced going forward. From that perspective, if you have the money, it is advisable that you lock-in by June.
(The writer is a corporate trainer (financial markets) and author)