Public provident fund interest rate cut from 8.7% to 8.1% | business | Hindustan Times
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Public provident fund interest rate cut from 8.7% to 8.1%

business Updated: Mar 19, 2016 01:20 IST
HT Correspondent
HT Correspondent
Hindustan Times
Public Provident Fund

While middle-class Indians rely on small-investment options offered at post offices for social security and parking surplus money, the government depends on this pool of money, also called the National Small Savings Fund, to finance part of its budget.(Reuters File Photo)

The government announced on Friday sharp cuts in interest earned on a range of state-run savings schemes including the popular public provident fund, the Kisan Vikas Patra and senior-citizen deposits.

Lower earnings on these schemes could force millions of households to shuffle their savings portfolios. Middle-class Indians rely on small investment options offered at post offices for social security and parking surplus cash.

Total outstanding deposits in such schemes stand at over Rs 9 lakh crore. Indians have been parking more than Rs 50,000 crore annually as additional savings in these instruments over the last three years. The government depends on this pool of money, also called the National Small Savings Fund, to finance part of its budget.

Economic affairs secretary Shaktikanta Das described the decision to cut interest rates as a “normal exercise of resetting” rates in March every year. The move will enable banks to reduce lending rates.

The rate of interest on the PPF (Public Provident Fund) scheme has been cut to 8.1% for investments made during April 1-June 30, 2016 from 8.7% currently.

Investments in the Kisan Vikas Patra will earn a return of 7.8% from 8.7% at present, while senior-citizens savings scheme deposits of five years would earn 8.6% interest compared with 9.3% currently.

The senior-citizens savings scheme will fetch 8.6% per annum compared to 9.3% currently, which could upset financial plans of pensioners and individuals who are nearing retirement age.

Likewise, the Sukanya Samridhi Yojana will give a return of 8.6% from 9.2% at present. The scheme launched last year was specifically designed to encourage parents to set aside money for girl children to fund their education and other future needs.

The government last month announced a decision to move to a new system for interest rates on state-administered schemes, making these market-linked. Market rates move in tandem with government bond rates that are currently on a downward trend. Under the new system, rates will be revised every quarter, as opposed to an annual review.

The move is expected to allow banks to pass on policy rate cuts by the central bank through lower lending rates.

“Banks will have to decide on their own. Government has given signals to them. It is for the banks to take a decision and move forward,” Das said.

Banks say they are forced to offer high interest rates to depositors to make it more attractive for people to park extra funds with them ahead of post-office and other state-run savings schemes.

While the Reserve Bank of India has cut the key policy rate by 1.25 percentage point in the past year, banks have passed on the benefit to borrowers by lowering lending rates by just 0.70 percentage point.

While one-year post-office fixed deposits will earn 7.1% from 8.4% at present, the rate on two-year deposits has been cut to 7.2% from 8.4%.

Three-year fixed deposits in post offices will earn 7.4% from 8.4% at present while five-year deposit rates have been cut to 7.9% from 8.5%. Deposits in five-year national savings certificates will earn 8.1% from 8.5% at present.

“This (cut in rates) is being done to make small-saving interest rates more market-linked and more market-aligned,” Das said.