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Will Small Saving Scheme Rates Reduce Further? Know Here... - Outside View by PersonalFN

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Will Small Saving Scheme Rates Reduce Further? Know Here...
Oct 6, 2017

The interest rate on Public Provident Fund (PPF) may fall to a 37-year low soon.

And those on all other Small Savings Schemes (SSS) may also decline in next few days. The Government is contemplating reducing interest rates on SSS by 10 Basis Points (bps). One basis point is one-hundredth of a percentage.

Interest rates on SSS at present...
Small Savings Scheme Interest rate
5-year National Savings Certificate (NSC) 7.8%
Senior Citizen Savings Scheme (5-year maturity) 8.3%
PPF 7.8%
Sukanya Samriddhi Yojana 8.3%
Kisan Vikas Patra 7.5%
(Source: India Post)

Historically, interest rates on SSS were shuffled only once a year. However, the Government changed this practice in the recent years when banks complained about deposits turning unattractive due to administered rates on SSS. So, the Government tried to ameliorate SSS rates with more market drive.

The strategy is likely to backfire on the Government if it decides to lower the interest rates even in Q3, FY 2017-18.

As you know, Prime Minister, Mr Modi's bold move of demonetisation negatively impacted India's Gross Domestic Product (GDP). India's GDP growth for Q1FY18 came in at a dismal 5.7% (a 3-year low) as against 6.1% in the previous quarter. The Gross Value Added (GVA) -- a refined parameter which excludes taxes and subsidy --too dwindled to 5.6% from 6.6% in the last quarter and significantly lower that 7.6% a year ago. According to CA Anant, the Chief Statistician of India, there were two elements that attributed to weak GVA growth:

  1. The price rise; and
  2. Reduction in inventories during the quarter April-June 2017 ahead of GST.

The expenditure trend suggests, the Government spending remained strong (as Government Final Consumption Expenditure grew 17.1% in Q1F18), consumer spending steady (Private Final Consumption Expenditure grew 6.6%), and investments rather stagnant (as Gross fixed capital formation grew at just over 1%). The significant slowdown in the manufacturing sectors and poor performance of financial, insurance, real estate, and professional services sector have resulted in muted GDP growth in Q1FY 18.

The RBI, in its 4th bi-monthly monetary policy statement for 2017-18 (held on October 4, 2017) has lowered growth estimates for India to 6.7% from 7.3% projected in August 2017, with the risk evenly balanced. "The loss of momentum in Q1 of 2017-18 and the first advance estimates of kharif food grains production are early setbacks that impart a downside to the outlook. The implementation of the GST so far also appears to have had an adverse impact, rendering prospects for the manufacturing sector uncertain in the short term. This may further delay the revival of investment activity, which is already hampered by stressed balance sheets of banks and corporates" stated the central bank. Private sector capex cycle hasn't picked up yet. There's no sign of a revival. As the credit demand is expected to remain lacklustre, banks are reluctant to raise deposits at higher rates. This has left investors with sparse choices to invest their hard earned money.

Retail inflation (as measured by the Consumer Price Index (CPI)) has fastened for the second consecutive month in August 2017 to 3.36% from 2.36% in July 2017, as the Consumer Food Price Index (CFPI) reported a positive reading (of 1.52%) after three months of contraction. The price revision post-GST, the disentangling of the structural and transitory factors shaping food inflation, and the favourable base effect waning; have weighed on headline inflation. Thus in its s 4th bi-monthly monetary policy statement for 2017-18 maintained a status quo on policy rates. The central bank now expects inflation to rise from its current level and range between 4.2-4.6% in the second half of this fiscal year.

The heat of these events is felt by the aam aadmi, conservative investors, and retiree who mainly invest in fixed income investment instruments. Bothered about your retirement planning? Click here for quick help.

At present, the macroeconomic situation justifies lower interest rates, but to avoid the public wrath, the Government might prefer to keep interest rates on SSS unchanged this time.

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PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

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