The government has stopped issuing the 8% Government of India (Taxable) Bonds, 2003 as of 2nd January 2018. The latest move is part of the government’s policy to link the interest rates on small savings to those on government bonds.
The move will affect senior citizens and retirees who had seen these bonds with sovereign ratings as some of the safest instruments to invest in. Besides, they have an interest of 8% compared to bank interest rates of 6-7%.
The interest rates for other small savings were also reduced for the January to March quarter (last quarter of FY 2018), with the exception of Post Office Savings Deposit and Senior Citizens’ Savings Scheme. They are listed in the table below.
|Instrument||Interest Rate % (Jan-March 2017)||Interest Rate % (Jan-March 2018)|
|Post Office Deposits|
|1-year time deposit||7||6.6|
|2-year time deposit||7.1||6.7|
|3-year time deposit||7.3||6.9|
|5-year time deposit||7.8||7.4|
|5-year recurring deposit||7.3||6.9|
|5 year Senior Citizens’ Savings Scheme||8.5||8.5|
|5 year Post Office Monthly Income Scheme||7.7||7.3|
|5 year National Savings Certificate||8||7.6|
|Public Provident Fund||8||7.6|
|Kisan Vikas Patra||7.7||7.3|
|Sukanya Samriddhi Scheme||8.5||8.1|
The rate cuts and discontinuance of the 8% taxable government bonds will hit savers in these small schemes. Debt mutual funds which are their closest alternatives have also seen a reduction in returns. The one-year return on these funds ranges from a high of 7.81% for credit opportunities funds to just 2.39% on medium and long-term gilt funds. The returns on the longer maturity funds have fallen dramatically due to rising government bond yields.
In contrast, equity funds have yielded stellar returns ranging from a whopping 55% return on small-cap funds over the past year to 29% for large-cap funds. In other words, moving up the risk spectrum has proved rewarding.