RBI rate hikes likely to cause bump in small savings interest rates

Interest rates for small savings schemes are set to rise when they come up for review during the October-December period. Government officials and analysts say this will be due to consecutive policy rate hikes by the Reserve Bank of India and the rise in ten-year benchmark government bond yields resulting from that.

Since 2016, the interest rates of the 12 small savings schemes have been reviewed quarterly. They were unchanged for the April-June and the ongoing July-September quarter, after being tweaked for the January-March 2018 quarter.

“When the rates come up for review during the October-December quarter, the repo rate increases by RBI, and the benchmark bond-yields will definitely be taken into consideration. But there will be no tweaks to the rates in the middle of the ongoing quarter,” said a senior Finance Ministry official.

Rates on small savings schemes are decided upon on the basis of a formula. "It depends on how the G-sec rates have moved. There were no changes to the small savings rates for two quarters. The g-sec rates have gone up meanwhile. That means there has to be an increase in the small savings rates,” said Madan Sabnavis, Chief Economist at Care Ratings.

The Finance Ministry uses a different formula to determine the rate of each small savings scheme. For example, to calculate the interest rate of public provident fund, the preceding quarter’s average of the 10 year g-sec is taken, and a 25 basis points spread is added onto it. The five year senior citizen scheme takes the average of the benchmark bond yield for the preceding quarter and adds 100 basis points onto it.

According to Bloomberg data, the India Government Bond Generic 10 Year Yield has gone from 7.13 per cent in early April to 7.76 per cent as on Friday evening.