NEW DELHI: Investors in small savings schemes like PPF and KVP should not be perturbed by the cut in interest rates and continue to invest in these instruments.
Today, small savings schemes earn higher interest rates compared to bank rates and thus are more attractive. This has been adversely affecting deposit collection of banks. The difference between the interest rates on small savings schemes and banks is 1-2 per cent. Banks find it difficult to pass on the rate cut by Reserve Bank of India (RBI), due to stiff competition from government saving schemes.
Analysts say investing in these instruments is still safe, since the government and RBI keep a watch on them. Interest rates do not work in isolation. They are connected to inflation — it is the rate at which the prices of goods and services change over time.
Inflation is controlled through interest rates. If the interest rates are higher, it means households will pay more interest on their EMIs, which means they have less money to spend for other goods. If interest rate is cut, households will have more to spend.