Last fortnight the government lowered interest rates on most small saving schemes by 10 ten basis points (bps) for financial year 2012-13, in sync with lower yield on government bonds last year. For one-year time deposit and savings deposit, the rate remains the same.
Small saving schemes envisaged by the Government include Public Provident Fund (PPF) and National Savings Certificate (NSC) to Monthly Income Scheme (MIS) and senior citizens savings scheme (SCSS). The latest rate cut is in conformity with the recommendations of the Shyamala Gopinath Committee and as such, the government made these changes, benchmarking interest rates on small savings to yield on government securities.
So, your PPF will now fetch 8.7 per cent return against 8.8 per cent last year. PPF is one of the well-known saving products in which the interest earned is tax-free, making it one of the most attractive investments, besides being eligible for tax rebate.
The rate on 5-year National Savings Certificates or NSCs has come down from 8.6 to 8.5 per cent and the rate for 10-year NSCs from 8.9 to 8.8 per cent, while 5-year deposits will earn 8.4 per cent compared with 8.5 per cent.
The finance ministry has implemented it in such a way that the new small savings rates are still seen as competitive in relation to other instruments like as bank deposits.
Bank deposits of 3-year tenure, which yielded average interest of about 9.25 per cent last April, will now yield 8.7 per cent, while 5-year deposits too will fetch a yield ranging from 9.25 to 8.6 per cent.
If you need some more elucidation, you need to go back a couple of years, to 2011, when small savings rates got market-linked. For instance, PPF was linked to 10-year government securities (G-secs); here the average of the previous year’s rates are taken and then marked-up. In the sense, if the G-sec given 8 per cent on an average, the rate for PPF would then be pegged at 8.25 per cent.
The rates are not such a big deal, says Rajesh Dedhia, Director, Vantage Institute of Financial Markets, a subsidiary of BSE-listed Vantage Corporate Services. In fact, Planning Commission Deputy Chairman Montek Singh Ahluwalia reportedly stated that the reduction in small savings scheme rates was necessary for overall lowering of interest rates.
“If you want a low (lending) rate environment, you cannot say that you want higher interest rates for savers,” Ahluwalia said, adding: “They have probably moderated a little bit in line with the softening of interest rates.”
According to him, inflation in real terms is much lower now than it was two years ago and in that sense, “the interest rate is more favourable now in real terms.”
The accretion to the small savings scheme comprising deposits, NSCs and PPF slowed down a bit to Rs 16,086 crore in December 2012 as compared with Rs 16,297 crore in the year-ago period.
According to RBI data, the outstanding amount in small savings schemes as of December-end 2012 was lower by Rs 8,782 crore to Rs 6,01,961 crore compared from Rs 6,10,743 crore a year ago.
Out of those three heads under the small savings scheme, accretion in December 2012 slowed in the case of deposits and the 15-year PPF (which fetches 8.80 per cent interest, compounded annually) at Rs 14,079 crore (as against Rs 14,588 crore in December 2011) and Rs 335 crore (against Rs 351 crore), respectively.
Whereas savings certificates (NSC VIII issue with interest at 8.60 per cent, compounded six monthly), however, saw higher fund inflows of Rs 1,672 crore in the same period ( as against Rs 1,358 crore in December 2011).
Even within the deposit schemes, savings bank deposit scheme (fetches 4 per cent interest) and the monthly income scheme (8.50 per cent interest) saw a slowdown in inflows at Rs 7,094 crore (Rs 7,826 crore) and Rs 1,690 crore (Rs 1,954 crore), respectively.
Time deposits (of post office) – whose interest is payable annually but calculated quarterly ranging from 8.2 to 8.5 per cent depending on the tenure – and the 5-year recurring deposits (interest at 8.40 per cent compounded quarterly) saw good inflows of Rs 1,806 crore (Rs 1,592 crore) and Rs 3,108 crore (Rs 2,974 crore), respectively.
Buying gold as a hedge
Also, high inflation is prompting some investors to put a portion of their surplus (money) in gold, which is seen as a hedge against inflation. Simply put, close to 50 per cent of the country’s total savings is locked in physical assets such as gold and real estate, while about 20 per cent of the total savings was held for pure investment purposes, pointed out McKinsey & Co’s Director Alok Eknath Kshirsagar recently at a banking event in Chennai.
Then comes, inflation indexed bonds (IIBs) to be formulated in the current fiscal. As for stock markets, nothing exemplary as of now, as both secondary and IPO markets where most of the stocks are currently below the listed rates, forcing retail investors to look for viable alternatives like IIBs.
By definition IIBs are good because they offer inflation- adjusted return, for instance, if one buys a normal bond and it offers 10 per cent fix coupon, it will remain throughout the term of that bond. However, inflation may change. Therefore, inflation-adjusted real rate will be lower; for example if returns are 10 per cent and inflation is 7 per cent then it comes to 2.80, if inflation goes to 8 per cent then it comes to 1.85. As such, with increase in inflation the real rate comes down.
Realty as investment product
Given the trend of rising property prices over the past few years, the price of the property you have in mind or short-listed will in all probability keep going up as you wait.
Take a cursory glance at the data for the past few years you will realize that real estate has been a rewarding asset class. For instance in 2011, seen as one of the worst years for equities as the BSE Sensex fell nearly 25 per cent, but prices of home in most Indian cities remained firm despite the overall economic uncertainty, both in global and domestic markets.