30 June 2017 10:34:06 IST

FinMin slashes interest rate on small savings schemes by 0.1%

Return on PPF will be 7.8%, Sukanya Samriddhi and Senior Citizens Scheme 8.3%

In a big blow for small investors, the Finance Ministry has further slashed the interest rates on small saving schemes such as the Public Provident Fund (PPF) and the Kisan Vikas Patra (KVP) by another 10 basis points.

The new rates, notified by the Ministry on Friday, will be effective for the second quarter of the fiscal between July 1 and September 30.

According to the new rates, the return on PPF will be 7.8 per cent against 7.9 per cent interest offered in the first quarter of the fiscal. In contrast, the immensely popular PPF yielded a return as high as 8.7 per cent till 2015-16.

The government had from April 2016 moved to a quarterly reset of small saving rates and were linked to the yield on government securities to help improve transmission of monetary policy by banks.

At that time, the return on PPF was slashed to 8.1 per cent.

For the second quarter of 2017-18, the Sukanya Samriddhi Yojana and the Five-Year Senior Citizens Savings Scheme will continue to offer the highest return among all small savings schemes of 8.3 per cent against 8.4 per cent in the first quarter.

KVP, which will now mature in 115 months against the earlier 113 months, will have an interest of 7.5 per cent. Interest rate on the savings deposit scheme has however, been retained at 4 per cent.

Pointing to higher liquidity over the last eight months following demonetisation, analysts said that the relative stickiness in small savings rates has not hindered a fall in banks’ deposit rates, unlike in previous phases of tighter liquidity.

“Given the continuing and substantial liquidity surplus, liquidity management measures and rate action by the RBI are likely to emerge as the key drivers of deposit rate cuts in the ongoing year,” said Aditi Nayar, Principal Economist, ICRA, adding that the changes in small savings rates will help in policy transmission when liquidity moves closer to neutrality.