By Ruma Dubey

On the 1st of July, when all eyes were on the ushering in of GST, what we all missed was the quarterly recalibration of interest rates on small savings. And this most certainly has a huge bearing on the senior citizens and multitude of us who invest quite a substantial chunk of money in these small savings schemes – the nest egg for bad times/old age.

The Govt, last Friday, reduced rates by 10 bps for the July-September period from the rates applicable in the previous quarter, which in turn will now prompt banks to lower deposit rates. Rates have been slashed across the board for schemes such as National Savings Certificate, Sukanya Samriddhi Account, Kisan Vikas Patra (KVP) and Public Provident Fund (PPF). However, interest on savings deposits has been retained at 4% annually.

Take a look at the new rates; effective 1st July 2017, valid till 30th Sept 2017.

• PPF rate cut from 8.7% to 7.8%
• Rate on KVP slashed from 8.5% to 7.5%- to mature in 115 months v/s earlier 113 months
• Five year Senior Citizen Savings Scheme rate cut to 8.3%
• Sukanya Samriddhi Account scheme cut from 9.2% to 8.3%
• NSC rate cut from 8.5% to 7.8% \
• Interest rate on the savings deposit scheme retained at 4%.

This rate cut is a part of the Govt’s move to bring down the cost of capital. There is enough liquidity in the system today and by bringing down rates of small savings schemes, the Govt is indirectly bringing down the rates on bank deposit/lending rates – this in turn will be good for the entire industry.

But for the risk averse investors who put most of their savings in such small savings, this will be a big blow. At the same time, it is also an indication of things to come in the future – rates on such small savings will only keep falling; they will either have to contend with lower interest incomes or change their attitude towards risk – invest in equity directly or through mutual funds. There is simply no other way around it.

What this also probably heralds is RBI too announcing a rate cut to help bring about a level playing field. Once again, a lower interest rate alone will not usher in economic growth; this will come only when private sector investment rises and employment opportunities are generated.

The BIG question therefore is whether we should continue investing in small saving schemes when we know rates are only going to go down further? Those who are younger, just begun their work life – in the age group of 22 to 35 years, they surely should look at equity more and less at these schemes though PPF should be a mandatory savings tool, irrespective of the returns. Senior citizens cannot afford to take a risk and they need to keep investing in the same schemes –some part of the lower returns can be augmented through mutual funds if there remains an appetite to digest even moderate risk.

The bottomline though is that irrespective of the fallings rates, small saving schemes will remain crucial and we should continue to earmark at least 20% of the savings towards them – they are much better than company/bank deposits.