The government has raised the interest rates of small savings schemes by up to 70 basis points for the quarter ended June, making them competitive against bank fixed deposits (FDs).

The National Savings Certificate (NSC) has seen the maximum increase, going up from 7% to 7.7% and bettering most bank FDs for non-senior citizens. The tenure of NSC is five years and the minimum investment amount is Rs 1,000. There is no maximum limit.

After the government hiked the April-June quarter rates, the return on post office term deposits of five years has climbed to 7.5% from 7% earlier. The interest rate for the 5-year recurring deposit is 6.2%, up from 5.8%. 

The interest rate on the Sukanya Samriddhi Account Scheme has increased by 40 basis points to 8%. This government-backed scheme is for parents who can open an account for the girl child below 10 years of age. The account needs to run for a minimum period of 15 years.

The Kisan Vikas Patra, which has a maturity period of 115 months, will give a return of 7.5%. Earlier, this scheme attracted an interest rate of 7.2% with a maturity period of 120 months.

The monthly income account scheme has interest rate of 7.4%, up from 7.1% earlier.

The return on post office term deposits of three and two years under the small savings schemes has gone up by 10 basis points to 7% and 6.9%, respectively. 

The one-year time deposit is now 6.8%, up from 6.6%, and in line with the banks’ interest rate for the same maturity period.

The government has, however, left the Public Provident Fund (PPF) scheme unchanged at 7.1%.

Post office term deposits, which were fetching lesser returns than bank FDs, have returned to competitiveness with the government effecting three back-to-back increases in interest rates on small savings schemes.

For the October-December quarter of 2022, the government increased the interest rates on small savings instruments (SSIs) by 10-30 bps. This was further raised by 20-110 bps for the quarter ended March 2023. In the first quarter of the current fiscal ended June, the government has hiked the rates by 10-70 bps.

The interest rates on SSIs had remained unchanged for nine consecutive quarters — from the second quarter of 2020-21 to the second quarter of 2022-23.

The small savings rates are linked to government bond yields of the same maturity and are reset every quarter. With bond yields rising sharply, the rates of SSIs have also started climbing.

Banks have also raised the FD rates during this period as the Reserve Bank of India (RBI) has raised repo rates by 250 bps to 6.50% since May 2022.

The weighted average domestic term deposit rate (WADTDR) on fresh deposits (including retail and bulk) of banks increased 222 bps from May 2022 to February.

During H1, banks had focused on mobilising bulk deposits. This was reversed in H2 with the increase in fresh retail deposit rates (122 bps) outpacing that in fresh bulk deposit rates (77 bps).

The transmission to WADTDR on outstanding deposits is picking up, albeit gradually, reflecting the longer maturity profile of term deposits contracted at fixed rates, the RBI said.