The government has hiked the interest rates of a few small savings schemes by between 20 bps and 110 bps for the January-March 2023 quarter. The finance ministry made this announcement via a circular issued on 30 December 2022. (One percentage point is equivalent to 100 basis points.) The interest rates of schemes like the Senior Citizen Savings Scheme, Monthly Income Savings Scheme, National Savings Certificate (NSC), Kisan Vikas Patra (KVP), and all post office time deposits (TD)have been hiked.

The Reserve Bank of India (RBI) has been increasing key rates since May 2022. Due to this, banks have been increasing interest rates on fixed deposits (FD) which is good news for FD investors who have been sitting with decadal low interest rates.

The government has raised interest rates on eight of the 12 small savings schemes by 0.2% to 1.1% for the January to March 2023 quarter. However  interest rates of the Public Provident Fund (PPF), Sukanya Samriddhi Yojana have not been changed for this quarter as well.

Interest rate of Senior Citizen Savings Scheme was hiked by 20 bps to 7.6%. The interest rate of post office time deposit with a tenure of 3 years was raised by 30 bps to 5.8% and 2-year tenure by 20 bps to 5.7%. The Sukanya Samriddhi Account scheme’s returns were retained at the prevailing 7.6%, while the return on KVP and the NSC were raised by just 0.2% each, to 7.2% and 7%, respectively.

The latest interest rate hike (i.e., for the January-March quarter) was expected as the government bond yields have risen. Small savings rates are linked to government bond yields of the same maturity and are reset every quarter. Now that bond yields have risen sharply, small savings rates have been revised upwards.

How interest rates are set for small savings schemes

The interest rates on small savings schemes are reviewed every quarter by the government. The formula to arrive at the interest rates for small savings scheme was given by the Shyamala Gopinath Committee. The committee had suggested that the interest rates of different schemes should be 25-100 bps higher than the yields of the government bonds of similar maturity.

Last time interest rates were hiked

After close to four years, the government in the previous quarter had increased the interest rates of certain small savings schemes. The interest rates of three small saving schemes have been hiked by 10 bps to 30 bps for the October-December 2022 quarter.

Source: Finance ministry circular

As inflation has already shown signs of cooling and if this trend continues, we may not see a significant hike in next quarter also. However, if the inflation trend reverses upward or remains sticky at higher level then interest rates may be hiked in March 2023 also.