The last change in the interest rates of the Small Savings Plans (SSS: better known as Correos Plans) was for the April-June 2020 quarter and was notified on March 31, 2020. The change in the interest rate obviously went down.
That was when we were in the middle of the Covid pandemic. The Reserve Bank of India has cut interest rates and injected ample liquidity into the banking system to prop up the flagging economy. As a result, yield levels (interest rates), which are the benchmark interest rates for small savings plans, fell sharply in the secondary government bond market.
Despite this, SSS rates remained at attractive levels. We sometimes hear rumors that interest rates could be revised lower for the next quarter, but since June 2020 interest rates have been stable in all quarters.
It was dramatic last year when interest rates for small savings investments were slashed thanks to a government announcement on March 31, 2021. The interest rate on the National Savings Bond was reportedly lowered from 6.8 % to 5.9%, and the monthly income plan was reduced from 6.6. % to 5.7% and so on. But the next day the order was withdrawn and the prices were maintained.
Interest rates on small savings plans are revised quarterly by the government by reference to the traded yields (interest rates) on government securities in the secondary market. There are fixed formulas for margins on government bond trading levels. The reason it is associated with G-Sec returns on the secondary market is that it coincides with movements in interest rates. G-Sec’s yield movements reflect actual and expected events in the economy related to interest rates.
As an example of a premium, the Senior Savings Plan spread is 1% over G-Secs of comparable maturity. To clarify the markup, let’s assume that the G-Sec reference rate is X% and the formula markup is Y%. Therefore, the rate must be X% + Y%. However, if the rate is higher, say X% plus Y% plus Z%, then Z represents government generosity on behalf of citizens.
That was what happened. After June 2020, SSS rates held up, although G-Sec yields declined. In other words, there was a significant element of that “Z%”.
Examples of Benchmark Yields and Real Interest Rates
In the case of the senior savings plan, the average return of the G-Sec with the corresponding term, that is, 5 years, from December 2021 to February 2022 is 6.1%. With a premium margin of 1 percentage point, the rate would be 7.1%. For the April-June 2022 quarter, where the benchmark is the December 2021-February 2022 average, the rate remained at 7.4%. So there is an additional gap, the Z mentioned above, of 0.30 percentage points.
Likewise, there is an additional gap or Z of 0.31 percentage points for the period April-June 2022 for the issuance of the National Savings Certificate VIII.
Things have changed since the early stages of the pandemic when the RBI cut rates and G-Sec yields. G-Sec’s returns on the secondary market have increased. This is due to several reasons: the market is concerned about RBI rate hikes, inflation is a concern, interest rates are rising around the world, there are large government bonds, etc.
The implication is that the additional spread (the Z component) used to be even higher when G-Sec yields were even lower. For example, the additional gap in the April-June 2021 quarter for the senior savings plan was 0.89 percentage points, compared to 0.30 percentage points today. For the NSC VIII program, the Z component for April-June 2021 was 0.92%, compared to 0.31% mentioned above.
Yes and no. In some systems, such as the B. Public Provident Fund (PPF), the revised rate is applied to the entire amount, including your previous payments. So there is no blocking here.
On the other hand, there are certain contractual repayment routes, for example, National Savings Certificates (NSC), Kisan Vikas Patra (KVP), time deposits, etc., where you can get current rates. If interest rates are revised lower, new investments will only be made at lower interest rates.
The government allowed interest rates higher than the formula rate as a social good. In the bearish cycle of interest rates, interest rates have been maintained since mid-2020 even with a high additional margin (Z%). Now that the RBI is set to raise rates and the cycle is about to turn, SSS rates are likely to remain on hold and not rise, although no one knows for sure. Generosity goes both ways.
SSS rates are not expected to increase any time soon, as there is a “generosity component” – the Z mentioned above. However, if interest rates rise significantly in the future, causing Z to become zero or negative, SSS rates rise as well. slightly. Only time can tell.