Post Office Savings Schemes Rate Unlikely To Go Down Swiftly: Here's Reason

Post office savings scheme interest rates are reset every quarter based on the yield on 10-year benchmark bonds. Now, even as the bond market will get a boost from the RBI's announced long term repo operations (LTROs) of Rs.50,000 crore in aggregate, there will shall be a consequent decline in bond yield, but interestingly savings scheme rates are unlikely to see any downward push.

Post Office Savings Schemes Rate Unlikely To Go Down Swiftly: Here's Reason

The last time, the interest rate on these sovereign-backed scheme was revised was in July-September quarter of last year.

Here we tell why interest rates on post office schemes such as PPF, term deposit, NSC, KVP, SCSS, SSY are unlikely to trend sharply lower:

As per SBI's Economic Research Department there is huge reliance on funds garnered through this channel and it helps in the funding of government's food subsidy bill. "It seems that a large portion of food subsidy bill is getting shifted to next year to be funded through NSSF. Going forward, the increased reliance on small savings, in turn, would make it difficult for the Government to cut small savings interest rate and thus bank deposit rates might be impacted", said the release by SBI.

Notably, all of the funds accumulated by way of deposits towards different schemes is transferred to the National Small Saving Fund (NSSF) and all payments and withdrawals are made from it. Further, in accordance with the report, the centre has reduced food subsidy bill tremendously and the same has to be financed from small savings funds.

So, it shall be hard for the centre to announce a rate cut on small savings scheme given the impact it could pass on to bank deposit rate. Banks at the moment shall also not reduce rate swiftly as then there is feared offloading of interest in banks for a better return from these small savings schemes.

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