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)

Now let us see what happens if you invest Rs. 100,000 for a period of 10 years…

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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  1. This is a punch in the gut for those depending heavily on one/two/all of these investments, viz the ‘risk-averse’ investor, in other words RAI . The sting is in the tail – more cuts likely every quarter. It’s a lesson for RAIs that you also need to consider legislative risk apart from credit risk, market risk and reinvestment risk even in debt instruments. Tax laws are NOT STATIC.
    Sad is the plight today, of the Senior citizens depending on good old debt investments like FDs, PPF, SSSC, KVP, NSC etc. But then life is never fair.

  2. Dear Sir,

    Agree 8.7 to 8.1% is not going to have huge impact on final corpus, but what happens if the govt keep decreasing every quarter, it will surely hurt people who heavily relying on PPF as their one of main retirement corpus.

    I feel some extend it is better to bear the pain of less interest compared to applying taxation.

  3. Abhijith Shreenagesh

    Hahaaa Subra Sir, I’ve been reading your blogs from 2012. We won’t click on it because of the headline, its the precious content we’re after.. Thanks.

  4. Reading the title of the document felt more like MSM ranting but I knew Subra is our role model and will talk logically. Thanks a lot for enlightening us with your wisdom, Subra. 🙂

  5. lakshminarasimman

    headline should be

    2019 elections – Rahul Gandhi becomes PM; Modi loses on PF,PPF and income tax laws

  6. Agree with lakshminarasimman. Modi govt hitting the salaried class is unexpected, hope this govt does not elected ever again …

  7. sir amazing that the humor is lost on so many of the people. not sure whether some of these people who comment even read the article – and if they do whether they understand anything at all 🙂

  8. Kanishka Manjrekar

    I think it was logical for the government to reduce rate of interest on most of the above schemes rather than taxing it later at the time of withdrawal since it increase volume of transactions. Now the Government should work to control inflation so that depositors are not hurt in the long run. If the Government is sincere and uses money saved on interest burden for development then depositors should be more than happy.

  9. Tamal Bhattacharjee

    I also want to know if interest will be calculated quarterly as other people enquired. In that case loss will be reduced more.

  10. good one!
    only problem is that 8.7-4 is 4.7 which is less than 4.1 (8.1-4), in effect enough for your need, but not for your greed…

  11. There is always justification for everything. When government can justify that they align interest rates to market rates, what happened to the market rate of the falling crude oil passed to common man? Again, justification for everything!! LOL.

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