Small savings inflows surge in FY22 due to Covid impact

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(This story originally appeared in on Feb 05, 2022)

NEW DELHI: There has been a sharp increase in inflows to small savings schemes such as public provident fund (PPF) in the current fiscal year as savers flocked to such safe haven instruments for better returns, against the backdrop of devastating impact of Covid, Budget data showed.

Falling interest rates on traditional savings products such as fixed deposits and the need to create safety nets due to the pandemic, triggered a shift to small savings products, which have remained attractive because of higher returns they offer and the impact of compounding.

For example, in 2021-22, savings de posits are estimated to increase by 21. 8% from 8. 8% growth in the previous year, while certificates (like NSCs) are also set to rise by 21. 2% in the current fiscal from 11. 8% in the previous year, according to data in the Budget documents (see graphic).

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Experts attributed the increase in investment in these schemes to the search for better returns. “Investors flocking to fixed income products are primarily on account of low yields on market-linked debt mainly mutual funds.

The volatility only increases with mark-to-market (MTM) impact on account of increase in interest rates. However, if you are true to your holding period then run-down maturities product offer you yields, which you will be able to earn, provided you hold till maturity. Investors may consider these products in a staggered manner spread over the next six-eight months,” said financial planner Surya Bhatia.

Government officials said inflows to small savings schemes are estimated to be on the higher side this year and are expected to moderate next year as FD rates rise. The RBI has pointed to the high rates as an obstacle to its ability to lower overall rates and has backed rationalisation of returns on these schemes.

“This year, we expect around Rs 6 lakh crore of inflows. But in a typical year it is of the order of Rs 3-4 lakh crore and in 2022-23 we expect around Rs 4. 25 lakh crore of inflows on a perspective that people will find other investment avenues to be equally attractive. But if it does not happen, then market borrowings will go down,” Ajay Seth, secretary department of economic affairs, told TOI in an interview. The Centre has kept the interest rate unchanged for these schemes for seven quarters. The 5-year post office scheme offers a 6. 7% rate, while PPF yields 7. 1% return.

“A surge in small savings collections in this fiscal has ensured that net borrowing of the government stayed within reasonable limits and even fall short of Budget estimates. In the current fiscal, the government has scaled down significantly the budgeted small savings collections. The jury is still out whether small saving collections will continue to be attractive,” said Soumya Kanti Ghosh, group chief economic adviser at SBI.

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