Small Saving Instruments


    In News

    • The recent move of the government to keep interest rates on small savings instruments unchanged comes as a setback for small investors.

    About Small Savings Schemes

    • Meaning: These are a set of savings instruments managed by the central government with an aim to encourage citizens to save regularly irrespective of their age
    • Higher returns: they are popular as they not only provide returns that are generally higher than bank fixed deposits but also come with a sovereign guarantee and tax benefits.
    • The schemes can be grouped under three heads: Post office deposits, savings certificates and social security schemes.
    • PPF and NSC: Schemes like Public Provident Fund (PPF) and the National Savings Certificate (NSC) will continue to carry an annual interest rate of 7.1% and 6.8% respectively.


    • Retail inflation: considering that retail inflation hit 7.97%, the existing rates on small savings schemes might have disappointed savers even though these are higher than banks’ fixed deposit rates.
    • Negative real returns: except PPF and Sukanya Samriddhi Yojana all other small saving instruments are currently fetching negative real returns amid high inflation.
    • Small savings rates are linked to yields on benchmark government bonds: but despite the upward movement in G-Sec yields, the government has not increased interest rates.
    • Depositors are losing money: While inflation is now over 7%, the one-year bank fixed deposit rate is now around 5.3%. It means depositors are losing money after adjusting for inflation.
    • Country lacks a proper social security system: Technically, negative real rates discourage savings and boost consumption. This, in turn, may fuel more inflation and lead to even more negative real rates.


    • Banks are now unlikely to go for a major hike in deposit rates: because if the government hiked small savings rates they would have been forced to go for a steeper hike in deposit rates to prevent money flow from banks to small savings schemes.
    • Stock markets: due to huge volatility in the wake of rising rates and foreign portfolio outflows, savers are looking at bank deposits and small savings instead of pumping money into stocks and mutual funds.
    • Equities: While one can strategize to invest in a good debt product yielding better returns, experts say equities are the best option for beating inflation and generating positive real rate of return.

    Way forward

    • Raising deposit rates: After the RBI hiked the repo rate banks have started raising deposit rates.
      • The rates for senior citizens are higher by 50 basis points for these tenures.
      • Other banks have also increased rates.
      • The hike in bank deposit rate will also depend on the credit demand, which has now started showing signs of growth.
    • Liquidity surplus: The banking system has been sustaining a liquidity surplus since 2019. If small savings rates are not raised, banks would not be forced to raise rates, unless they need to mobilise funds for credit demand.

    Source: IE