In a shocking move, the central government has sharply cut the interest rate on small savings schemes for the first quarter of the financial year 2020-21. The attractive interest rates offered on many small savings schemes have been slashed by between 70 basis points and 140 basis points. In financial understanding, 100 basis point amounts to 1 percent.
Post office savings hardest hit
As per a report in the Economic Times, saving schemes including Public Provident Fund (PPF), Sukanya Samriddhi Yojana and post office savings will be greatly affected. Interest rates on PPF and Sukanya Samriddhi Yojana have been reduced by 0.8 percent or 80 bps, each. Moreover, the saving schemes in the post office of some tenors have witnessed the biggest cut of 1.4 percent or 140 bps. As per new rates, PPF will fetch 7.1 percent (from earlier 7.9 percent), Sukanya Samriddhi Yojana 7.6 percent (8.4 percent), and the time deposits will give 5.5-6.7 percent for the first quarter of the running financial year.
It is to be noted that the interest rates were last revised in July 2019 excluding post office savings account by 10 bps. The government did not make any changes since then but there were calls in different segments to align these rates with the prevailing situation in the economy. This year's Economic Survey recommended reducing the interest rates.
Senior citizens to be badly impacted
The latest cut in the rates will badly affect fixed income investors, especially for senior citizens who are heavily dependent on interest as a major source of regular income. The situation has become worse in recent times for small savings account holders as the State Bank of India has already cut a substantial rate on its Fixed deposits (FD).
A report further says that one-year FD by the SBI is fetching less than 6 percent interest for the first time since 2004. SBI followed an interest rate cut announced by the Reserve Bank of India (RBI) on March 27, 2020. The cut meant SBI's one year FD will give a 5.2 percent return. But with retail inflation in February remaining at 6.58 percent, the real rate of interest would be negative on such an instrument.