Small Savings Scheme Interest Rates Crash: What now?

In a move that should have come as no surprise, but yet did, the government revised the small savings interest rates by 0.4% to as much as 1.3%. Some 'common men' using smartphones and high-speed broadband reacted angrily just as they did to Budget 2016 proposals. By the time this is published, I will not be surprised to see another 'petition' and another #rollback.

The government has (finally) decided not to allow small saving schemes the luxury of an exorbitant 'alpha' over G-sec rates.

Here is the full list of changes.

fixed-income-rates-N2

Official announcement Revision of interest rates for small saving schemes

My understanding is that all those schemes which have fallen by 1% or more will no longer have any alpha wrt G-sec rates. This is the offical announcement: Interest Rates of Small Saving Schemes to be recalibrated w.e.f. 1.4.2016

It is time that fixed income lovers recognise that no one, repeat no one  is above market volatility. We all live in a convoluted connected world where interest rates move up and down and the fate of small savings schemes are now more directly connected to the fate of our economy and our equity markets. A healthy sign.

I strongly suggest that we get used to it, because these rates will now be decided each quarter. Therefore, factors like inflation and forex rates will/may have a bigger impact on small savings rates. Fixed income fans will now have to use terms like beta, sigma and XIRR for small saving schemes!

The rate cut has nothing to do with this government. It was inevitable.

Excuse me, but I am filled with fiendish delight to see the 0.6% drop in the Sukanya Samdriti Yojana. I hope the government soon limits the scheme to only those who are eligible for LPG subsidy.

Many thought that SSY was immune even though it was clear enough when scheme opened that rates would be variable. That is the problem with irrational expectations. That is the problem with assuming fixed income is 'safe'.

That 0.5% extra return above PPF does not make SSY suitable for your child's education. As mentioned before, use SSY for your retirement instead: Sukanya Samriddhi Yojana vs PPF: An Illustration

What now?

The fault dear Brutus, is not in the rates but in our minds. The decrease in rates will not make much of a difference to the final corpus. If your portfolio was fully in fixed income, it would not have beat real inflation in the first place.

er ... we need to grow up Blaming this government is childish. Fixed income gains are cyclic too. That is the way the economy works. Our parents have suffered much bigger fixed income crashes in the early 2000s. This is a time to expect growth in the economy.

Realising that the goal is not to take the 'safe' path when it comes to building a corpus would help.

The goal is to take a path that has more than decent chance of building an inflation-protected corpus.

Diversification is key. Tax-free small savings schemes are welcome as long as we do not go overboard with them. The exposure should be limited to the extent that the portfolio still manages to beat real inflation levels.  Here is an example: Deciding on asset allocation for a financial goal

If your goals are 10 plus years away, consider an exposure to equity via mutual funds. There is no better time than the present -literally.

Rates are going to vary each quarter from now on. Reasonable and subdued expectations have never been more important.

If you are a senior citizen, stick with these fixed income schemes. Do not shift to debt funds or start a SWP in a balanced fund because 'someone advised you to'. If you are new to mutual funds, now is not the time to experiment with your full corpus.

If you are on the verge of retirement, you can consider some suggestions here: Low interest rate regime: investment options for senior citizens.

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17 thoughts on “Small Savings Scheme Interest Rates Crash: What now?

  1. Atul

    Thanks Prof for another piece of art. So, now can we expect quarterly payment of interest on PPF, compared to annually at present?

    Reply
  2. lakshminarasimman

    common man using smartphone and broadband - super satire

    sir expected 2 3 graphs showing variation due to all these reductions on final retirement corpus

    Reply
  3. Mahesh

    There has to be relarion between Savings scheme interest rates and loans. My home loan is pegged at 9.75% whereas my savings are in the range of 7-8.1%. I think that the difference is really high.
    Let's see from first April how does the margins cost of lending helps the home loan borrowers
    I think this is a good topic for you to write. Please write about it if not written already

    Reply
  4. Biswa ranjan satapathy

    Thank u very much for this useful article & all previous articles,what about the bank interest rates on fixed deposits,when it "ll be declared for 2016-17.

    Reply
  5. Biswa ranjan

    So for retirement only depending on fixed income schemes simply foolish now,so the invest amount needs to be invest in some small part in small saving scheme(tax free),major part in equity to beat inflation.for 80c tax deduction home loan is better option, money for retirement needs to invest in equity(interest taxable),return %age is high,tax free investment return%age less.

    Reply
  6. Dashrath Memane

    Hi,

    I am really happy to see your Blog and recent posts on Retirements, How to create inflation protected income, etc.
    I am going to retire in next two months and it is good that I have seen your posts. Otherwise I would have just invested my retiral corpus in advises by MF agents, Banks, Friends etc. ( This is WHAT I did in my service period).
    I will study all the Posts on HOW to invest retiral corpus, starting with 360 checkups etc.(luckily I have good corpus so will invest it wisely, as per your suggestions using various calculators)
    Thanks once again for your posts on retirements, I am lucky to see this at right time .

    Best regards
    Dashrath

    Reply
  7. KK

    which funds to choose for investments? Please suggest.

    investment horizon --> 8 years

    investment horizon --> 4 years

    Reply
    1. Arup Bhattacharjee

      KK...I think you are new to this blog...you are unlikely to get reply to such question from the author. He has published couple articles on how to select Mutual Funds which are very useful...you may like to refer the same.

      Reply
  8. P S THETE

    With these changes, Govtt. should relax exit route without any penalty in PPF, MIS AND OTHER SMALL SAVINGS.

    Reply
  9. s.r.sathe

    Can we assume that rate of interest applicable at the time of purchase of instrument (NSC, Sukanya,time deposit etc. except PPF) will remain fixed(constant) during entire life of that instrument purchased on particular date (like normal fixed deposits with banks)? When the rates were reset annually it were applicable for instruments purchased after revision.

    Reply
  10. Anand Vaidya

    I think this is a STUPID move at this time. Let us not forget that FM Jaitley has more than 110 CRORES of assets and I am sure he doesn't know /doesn't care about the suffering of the lowest income group

    Let me make a prediction: This NDA gov will lose power because of such "market friendly actions" when nothing on the ground has improved (costs, facilities, corruption etc)

    India has no social security system like EU or US. So gov has a responsibility not to take rash actions and bankrupt millions of retirees who really depend on that tiny alpha.

    Gov could have fixed 9% as the permanent interest rate for the first 25lakhs (corpus to be increased every 5 years?) of a Senior citizen. That will ensure millions get some assured income

    PS: I recently visited Canara Bank on 1st of month and there was a super long queue of Seniors waiting for that meagre FD interest/pension. Felt quite sad, maybe I could see myself in that situation in the next 20years?

    Reply
    1. Anand Vaidya

      Oh and don't tell me that gov has no money. Just look at all the waste and needless subsidies: Do we really need agri income to be exempt from IT? Do we really need Subsidy for Haj, visiting Israel etc?

      Reply
  11. sundararajan

    I may have to agree with Anand Vaidya on this topic. To begin with govt rational is that the so called inflation came down and interest rates have to come down. But in reality it is just the opposite. Inflation will never come down anytime in India. Ex. Whatever the reduction in petrol / diesel prices in recent months, have we ever seen any reduction in anything? be it grocery / travel (auto /bus/ train) etc (except if you own personal vehicles) Same with huge reduction of commercial gas cylinders, have you seen any reduction in prices in restaurants? In India it is always one way, up up and up. But either this NDA or UPA keep reducing interest rates on small savings for the really needy people. As he mentioned, until India has reasonable inflation and decent social security benefits, higher % should be provided for certain limit. ex Rs 25 lakhs etc.
    For every FM, these 5% (who actually pays tax) is the easy target. It is very rare to find any business pays any tax and if at all they pay, do they pay correct tax ? NEVER.

    Reply
  12. Shashank

    This was indeed an ill-timed move on part of government very likely to impact Modi's re-election prospects. The last thing India needs at this time is Congress coming back in power. Yet in a third-world country with no social-security cover and people just warming up to the idea that savings save their retirement, this move was really premature.

    Reply
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