Small savings inflows increase in FY22 due to Covid impact
Falling interest rates on traditional savings products such as time deposits and the need to create safety nets due to the pandemic triggered a shift to small savings products, which remained attractive in because of the higher yields they offer and the impact of compounding.
For example, in 2021-2022, savings deposits are expected to grow by 21.8% compared to growth of 8.8% the previous year, while certificates (such as NSCs) are also expected to grow by 21.2% in the current year. tax of 11.8% the previous year, according to data from the budget documents (see graph).
Experts have attributed the increased investment in these schemes to the search for better returns. “Investors are flocking to fixed income products primarily due to low yields on market-linked debt, primarily mutual funds.
Volatility only increases with the mark-to-market (MTM) impact due to rising interest rates. However, if you are faithful to your holding period, products with reduced maturities offer you returns that you can earn, provided that you hold them until maturity. Investors can consider these products in installments over the next six to eight months,” said financial planner Surya Bhatia.
Government officials have said inflows into small savings schemes are expected to be higher this year and likely to moderate next year as FD rates rise. The RBI has pointed to high rates as a hindrance to its ability to reduce headline rates and has backed the rationalization of returns from these schemes.
“This year we expect around Rs 6 lakh crore inflow. But in a typical year it is in the range of Rs 3-4 lakh crore and in 2022-23 we expect around Rs 4. 25 lakh crore inflow on the expectation that people will find other equally attractive avenues of investment. But if that does not happen, market borrowing will decline,” said Ajay Seth, Secretary of the Department of Economic Affairs, to TOI in an interview. The Center has kept the interest rate unchanged for these schemes for seven quarters. The 5-year Postal Program offers a rate of 6.7%, while the PPF yields 7. 1% yield.
“An increase in small savings collections during this financial year has ensured that the government’s net borrowing remains within reasonable limits and is even below budget estimates. During the current fiscal year, the government has significantly reduced collections of small budgeted savings. The jury is still out on whether small savings collections will continue to be attractive,” said Soumya Kanti Ghosh, group chief economic adviser at SBI.