What’s the News?
Ministry of Finance proposes a downward revision of rates on Small Savings Schemes and on the same day promptly withdraws the proposal.
What does that mean?
The Small Savings Schemes are used by a large section of the population and the interest rates usually tend to be a little higher than the other alternatives available. The government resets the interest rate on small savings instruments every quarter. On 31st March 2021, the government announced a substantial cut in interest rates on these schemes for the April to June 2021 quarter. The prevailing rates and the rates that were proposed are detailed in the table below:
Hours after notifying the downward revision, the Finance Minister in a tweet clarified that “interest rates of small savings schemes of GoI shall continue to be at the rates which existed in the last quarter of 2020-2021, ie, rates that prevailed as of March 2021. Orders issued by oversight shall be withdrawn”.
In India, a large section of the middle-class contributes to Small Savings Schemes and Public Provident Fund. If you are a salaried employee, it is very likely that you have exposure to one or more of these schemes. The nature of these schemes including a marginally higher interest rate and government patronage make them relatively attractive. While we have had a favourable view on some of these schemes, the illiquidity that is inbuilt into them does not excite us.
Our Recommendation on this matter
While the reversal of the downward reduction was quick on the 31st of March, we believe that the downward move is likely to come sooner than later.
How does this affect your wealth?
If you have invested in any of these schemes with a long-term view in mind, we would not recommend that you make a change now. It is advisable to build a disciplined approach to investing by applying asset allocation to achieving goals, maintaining a long-time horizon and setting realistic expectations. When looking at investments always focus on the real rate of return (returns adjusted for inflation) and do not chase risky opportunities for that marginal additional return.