So, small savings rates across the spectrum have been cut including that of the ever popular PPF, Senior Citizens Savings Scheme and the Sukanya Samriddhi Yojana.
In fact, the rates will now be reset every quarter.
Here is the new rate structure applicable on Small Savings Instruments from April 1, 2016:
People are shocked and dismayed at this drastic cut.
Unfortunately, if you too are, then you are missing the real picture. To see this real picture, you would have to add another column to the above table, that of inflation rate.
Small savings mathematics – interest rate, inflation rate, the real rate
Here is a chart for you to understand it yourself.
As you can see, REAL rates (= Interest rate – Inflation) are what you need to bother about.
You can earn a rate of 9% but if your inflation is 10%, you are effectively losing money. (the red box)
At a rate of 7%, if the inflation is 6%, you are effectively making real money. (the green box)
So, what to do?
Here’s an earlier post on small savings rate cuts. Read it to understand that you need to focus on your goals, your plan, your asset allocation and then decide which instruments fit in the best to help you achieve them.
Rest is all noise. Ignore.
To reiterate, this resetting of interest rates will happen every quarter now. Hopefully, you understand what you need to pay attention to.