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Surviving the fall

The changes in interest rates on small savings schemes,and what they signify for your investment portfolio.

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The interest rate landscape in India has seen some several developments since the start of this year. Interest rates on fixed deposits have been going down rapidly, but the major jolt has been the reduced rates on small savings schemes. Popular with retail investors, particularly retired individuals, they have been useful for meeting long-term needs. Given below are the changes that one should know about:

What's changed

  • On March 18, the government announced interest rate cuts ranging from 60 to 130 basis points (bps) for small savings schemes, effective from April 1, 2016 The schemes include public provident fund (PPF), post office schemes, recurring and term deposits, Sukanya Samriddhi Yojana, Senior Citizen's Saving Scheme, KisanVikas Patra and national savings certificate.
  • Starting this financial year, these rates will be revised every quarter. The current rate will be applicable till June 30.
  • Other than this, the recent policy rate cut of 0.25 per cent to 6.5 per cent, its lowest in five years, will ensure that deposit rates head south.

Why this change?
  • High interest rates in schemes such as post office term and recurring deposits were in direct competition with banks acting as a deterrent for the latter to cut deposit rates.
  • Given that there is a direct co-relation between deposit and lending rates, lower deposit rates will pave the way for comparatively lower lending rates Controlled inflation and the government's intent to rein in fiscal deficit to 3.5 per cent of the GDP are the other factors that prompted this decision.

Should you be worried?
  • This series of rate cut is just the beginning of a long journey towards a low interest rate regime.
  • Individuals can brace up for more interest rate cuts in the future.
  • The biggest concern is for senior citizens who rely solely on interest income for meeting their expenses.
  • For other individuals, all is not lost yet. At a time when consumer inflation is at 5.2 per cent, PPF yields 8.1 per cent, providing real return of 2.2 per cent, which is higher than return provided by bank deposits.

What to do?
  • Retirees who are not financially savvy and fall in the 10 per cent tax bracket can continue with traditional saving schemes.
  • But individuals in the higher tax bracket should recalibrate their investment strategy, perhaps move away from tax inefficient and lower yielding fixed/recurring deposits to debt funds.
  • Top rated debt funds have yielded over 9 per cent in a three-year time-frame, where returns post three years enjoy indexation benefits.
  • Tax free bonds are another option for individuals falling in the 30 per cent tax bracket.
  • For younger individuals especially parents with a girl child below 10 years, the Sukanya Samriddhi Yojana is still an attractive option, given the tax-free 8.6 per cent yield.
  • For middle aged individuals, equity mutual fund are the best bet along with fixed income options mentioned above.


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