Interest rates for small savings plans: are they too high?

[ad_1]
In October 2020, the inflation rate was slightly higher than the highest interest rate of 7.6% offered on the SSY.

The day-to-day reversal of a drop of up to 1.1% in interest rates on small savings plans – commonly known as post office plans – for the first quarter of fiscal year 2021-2022 raises doubts that current rates are too high.

If the interest rates on the small savings plans are compared to the current 4 percent pension rate, the rates look high – 7.6 percent on the Sukanya Samriddhi Yojana (SSY) plan of account, 7.4 percent on the Savings Plan for the Elderly (SCSS), 7.1 percent on the Public Provident Fund (PPF), 6.9 percent on Kisan Vikas Patra (KVP), 6.8 percent on the National Savings Certificate (NSC), 6.7 percent on 5-year term deposit, 6.6 percent on monthly income (MIS), 5.8 percent on 5-year recurring deposits, 5, 5% on 1-year, 2-year and 3-year term deposits and 4% on the postal savings account.

However, if the rates seem reasonable compared to the inflation rate, which was mainly above 6% in fiscal year 2020-21, reaching a peak of 7.61% in October 2020. The rate has fallen sharply, dropping from 6.93 percent in November to 4.59 percent in December not only because of the cooling of prices during the winter, but also because of the change in the method of calculating the inflation rate.

So in October 2020, the inflation rate was slightly higher than the highest interest rate of 7.6% offered on SSY.

While the inflation rate fell further to 4.06 percent in January, it raised its head again in February to hit 5.03 percent and is expected to continue its bullish movement for most of fiscal 2021- 2022.

interest rate, inflation rate, small savings plans, Post Office Schemes, Sukanya Samriddhi Yojana, PPF, NSC, KVP, Senior Citizen Saving Scheme, SCSSSource: Ministry of Statistics and Program Implementation (MOSPI)

The question is therefore: are the interest rates of small savings plans too high or is the pension rate too low?

The repo rate is one of the key rates used by policy makers to stimulate economic activity by lowering the rate or to control inflation by raising it.

When the repo rate is lowered, interest rates on deposits and loans fall, making deposits unattractive. As a result, people prefer to spend more and save less, which drives demand. On the other hand, low borrowing rates encourage industries to take out more loans to boost production, resulting in increased economic activities.

However, when the Repo rate is increased, interest rates on deposits and loans increase, making deposits attractive. As a result, people prefer to spend less and save more, which leads to lower consumption and investment, and ultimately lower demand. Higher rates also make imports attractive, which together with lower demand translates into lower inflation.

As finance ministers and central bank governors around the world use it to fight inflation, ideally the rate of pensions should match the rate of inflation.

However, currently in India, the focus is more on stimulating economic activity by keeping key rates low rather than controlling inflation.

Small savings plans can make you a safe crorepati; here’s how

The stock markets react positively, but the lower interest rate results in a negative return on fixed income instruments like bank term deposits (FDs) relative to the rate of inflation, as the money invested loses its power to purchase at maturity after failing to keep pace with rising price levels. The situation worsens further after paying income tax on interest earned on these instruments.

So, relative to the rate of inflation, some of the small savings plans give slightly better returns when the rate of inflation is low, while others are always lagging behind the increase in the price level. most of the year.

Therefore, it cannot be said that the current rates for small savings plans are excessively high.

Get Live Stock prices of ESB, NSE, American market and last net asset value, portfolio of Mutual fund, Discover the latest IPO News, The best performing IPOs, calculate your tax by Income tax calculator, know the market Best winners, Top losers & Best equity funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay up to date with the latest news and updates from Biz.


[ad_2]

About Johnnie Gross

Check Also

Abandoned $ 1.6 billion Missouri resort community goes viral

[ad_1] It is spookier than a haunted house – and much more expensive! A ghost …

Leave a Reply

Your email address will not be published.