National Savings Certificate and Public Provident Fund Interest Rates Hiked by 0.5%

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10-Yr National Savings Certificate to yield 8.9% while Public Provident Fund will fetch 8.8%

The small saving schemes will fetch a higher return from the next fiscal after government announced adjustments in the rates in line with the higher market rates.

The schemes will fetch 0.2% to 0.5% higher rates, a finance ministry release said. A ten year National Savings Certificate, or NSC, will now yield 8.9% while the popular Public Provident Fund (PPF) will fetch 8.8%. The savings rate will remain unchanged at 4%.

The small savings schemes had been seeing net outflow in recent years as the rate was lot less than what was available on other instruments.

According to the budget estimates there is likely to be a net outflow of Rs 10,000 crore from small savings schemes in the current fiscal.

However, investors are still likely to head to banks as even after the revision bank fixed deposit rates are higher than what is available under small savings scheme.

HDFC Bank, for instance, offers 9% on a term deposit of one year one day to one year fifteen day. The revised rate on post office deposit of one year is 8.2%.

Perhaps for this reason the government has budgeted only a modest Rs 1,200 crore inflow in the next fiscal.

The funds raised by the schemes go to the centre and the states. In the event of a muted inflow, the borrowing burden shifts to market, as was the case last year, which puts pressure on interest rates.

The revision in rates is based on the recommendations of the Shyamala Gopinath Committee for Comprehensive Review of National Small Savings Fund.
The panel had advised the government to link interest rates on small savings to market rates.

It had asked the government to notify interest rates afresh at the beginning of every financial year based on the average yields on government securities of similar maturity with a positive rate spread of 25 basis points. Yield on the benchmark government year bond ranged from 7.8% to 8.97% in the calendar year 2011 leading to upward revision in the interest rates on savings deposits. This is first revision in interest rates after the NSSF was revamped in December in line with the panel's recommendations.

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