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Budget 21-22: Why Govt May Cut Interest Rate Of PPF & Other Small Savings Schemes This Year?

By not raising the annual Public Provident Fund (PPF) contribution cap, Union Finance Minister Nirmala Sitharaman may have crushed the expectations of retail investors, but analysts predict that interest rates charged to investors on small savings schemes will not be lowered this year. Over the past few years, to finance its annual fiscal deficit, the government has become largely dependent on small savings schemes such as PPF, NSC, and post office deposits, and so on.

The budget projected that Rs 2.40 lakh crore would have to be borrowed from these schemes to fund the FY21 fiscal deficit, which ended out to be Rs 4.80 lakh crore eventually. As a percentage of the deficit, though, this borrowing was dropped to 26 percent, referring to an SBI survey, as opposed to FY21 budget projections of 30 percent. Financing from the small savings schemes is forecast at Rs 3.9 lakh crore or 26% of the fiscal deficit for the upcoming fiscal year 2021-22 (FY22). This underlines the value of inflows to these schemes on which the government is highly dependent and, thus, interest rates are unlikely to be lowered if investors do not move to good investment vehicles.

Consequently, it is doubtful that the interest rates of these schemes, which are announced on a quarterly basis by the Ministry of Finance, will be lowered as they are unable to continue to jeopardize the inflows due to the channeling process to cover the deficit. These interest rates for schemes such as PPF, National Savings Certificates (NSC) remained intact at 7.1 percent and 6.8 percent in the last quarter of FY21. The interest rate for the quarterly paid-out Senior Citizen Savings Scheme stands at 7.4 percent. During the January-March quarter of FY21, it was 7.6% for Sukanya Samriddhi Yojana, whereas the same was held at 6.9% for Kisan Vikas Patra Patra (KVP). These interest rates were last cut by 140 bps by the government in the first quarter of FY21, after which they were kept steady. 

Raman Sonu
Raman Sonu
Raman is an Author, writer and blogger. He has knowledge and understanding of finance, stock, and market research. He has done Bcom in Finance. Please contact me at raman.sonu2020@gmail.com for any feedback or concern.
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