In a move aimed at aligning interest on small savings with market rates, the government announced that it has cut interest rate (wef 1.04.2016) on
Public Provident Fund (PPF) to 8.1 percent against 8.7 percent
reduced rate on Kisan Vikas Patra to 7.8 percent from 8.7 percent
On 1-year time deposit to 7.1% from 8.4%
On 2-year time deposit to 7.2% from 8.4%
On 3-year time deposit to 7.4% from 8.4%
On 5-year time deposit to 7.9% from 8.5%
On 5-year National Saving Certificates to 8.1%
On 5-year Senior Citizen Scheme to 8.6% from 9.3%
On Girl Child Scheme to 8.6% from 9.2%
On 5-year recurring deposit to 7.4% from 8.4%
It kept interest rate on Postal Savings Deposits unchanged at 4%.
Actually there are 2 ways to react to this. One is the typical MSM way – as I have done with the headline. I am sure you were attracted by the headline. If you were, you continue to be addicted to financial porn and you need to attend one of my de-addiction camps.
The words to look for are ‘massive cuts’ ‘deep cuts’ , ‘cruel slash’, ‘middle class rip off’ , vicious cuts, ….of course a few of them will question the need for PPF, SSY, KVP and say ‘poor Indian retired old people’ – just jargon, IGNORE. laugh. Close eyes. Laugh. If there is nobody in a big room, ROFL….
The correct way is my regular way (let me call it the Subramoney way?). Then I am supposed to tell you the following:
Interest rates do not work in isolation. All over the world economists are concerned only with REAL INTEREST rates, NEVER with nominal interest rates. Nominal interest rates are the interest rates that the issuing authority tells you…so if the GoI tells you that the PPF carries an interest rate of say 8.7% p.a. that is the interest rate. Now it is telling you that the Nominal interest rate is 8.1% p.a.
What should concern you is the REAL INTEREST rate. Real interest rate is the Nominal interest rate MINUS Inflation. Let us assume that the current inflation rate is about 4% p.a. and that the inflation rate was 6% p.a. ONE YEAR AGO.
So what is the REAL interest rate? One year ago it was 8.7 MINUS 6 = 2.7% P.A.
What is the real interest rate now? it is going to be 8.1 MINUS 4% = 4.1% P.a. (4 and 6 have been used as an example)
if you invest Rs. 100,000 for a period of 10 years and the interest rate was 8.1% p.a. it would grow to Rs. 217899.9
and if it grew at 8.7% it would be Rs. 230300.8
Now tell me…was it worth reacting to the headline?
So if you are an investor and / or saver, just do NOTHING. Relax. After all the orgasmic reactions, the MSM will relax too.
So please, ignore headline, and keep investing.
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