Increase in Small Savings Schemes in FY22 Amid Falling FD Rates

In the current year, there has been a sharp increase in inflows to the small savings schemes like the Post Office Savings Schemes, Public Provident Fund (PPF), etc., for better returns against the backdrop of the impact of the COVID-19 pandemic. According to the government estimates in the Budget 2022 documents, the inflows are likely to be strong in FY22.

With the falling interest rates on traditional savings products such as Fixed Deposits (FDs) over the past few years and the need to build a safety net due to the pandemic, the investors are shifting to small savings instruments.

Investors are attracted to small savings schemes because they offer higher returns than the FDs and the impact of compounding. According to the Budget documents, in 2021-22, the estimate of savings deposits increased by 21.8% from 8.8% growth in the previous year. The certificates, such as the National Savings Certificates (NSCs), are set to rise by 21.2% in the current fiscal year from 11.8% in the previous year.

Government officials stated that inflows to small savings schemes are estimated to be higher this year and expected to moderate next year as FD rates increase. The Reserve Bank of India (RBI) pointed out high rates as an obstacle to lower overall rates and backed the rationalisation of returns on the small savings schemes. 

The department of economic affairs secretary stated that they expected around Rs.6 lakh crore of inflows this year. In a typical year, the inflows are about Rs.3-4 lakh crore. In 2022-23 there is an expectation of around Rs.4.25 lakh crore of inflows in anticipation that people will find other investment options attractive.

The Central Government has kept the interest rate unchanged for small savings schemes for seven quarters. The five-year post office scheme yields a 6.7% rate, while PPF offers a 7.1% return. Investors focusing on fixed income products are primarily due to low yields on market-linked debt, mainly mutual funds. Experts credited the rise in investment in small savings schemes to the search for better returns.

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