Positive Returns

Not really. The interest rate fall in recent years has been accompanied by a sharper decline in the inflation rate. And, as Jaswant Singh noted in his budget speech, the inflation-adjusted returns (or the real rate of return) on small savings today are higher than they were when interest rates were at their peak.

For instance, the real rate of return on PPF investments today, factoring in 8 per cent nominal returns, is about 3.6 per cent. That’s still more than in 1998, when you’d have earned a real rate of only 0.4 per cent; and in 2001, when the nominal interest rate on PPF was 9.5 per cent, you would in fact have earned negative real returns. That’s because inflation that year was 16.1 per cent.

For another, returns from PPF investments, being tax-free, offer a post-tax yield of 11.4 per cent (in the 30 per cent tax bracket). And this comes from an absolutely safe, government-backed investment, where the only risk is that interest rates may decline further.

All this is not to say that you’re doing well with a higher real rate of return when nominal interest rates drift downwards. For instance, when the interest rate on PPF investments was 12 per cent compounded annually, an annual investment of Rs 60,000 would have let you accumulate Rs 25 lakh over 15 years. And at the current rate of 8 per cent, you will have only Rs 17.6 lakh over the same period. If you have been investing with a financial goal in mind, you will have to step up your investments or move to a higher orbit of risk to meet that goal.

Then again, there are ways of tweaking out more returns from the available small savings options. For instance, the Post Office Monthly Income Scheme (MIS) will henceforth return 8 per cent a year, and gives a 10 per cent bonus on maturity. Similarly, a post office recurring deposit will give 7.25 per cent a year, compounded quarterly. By combining the two, that is, by ploughing the monthly interest from an MIS into the recurring deposit, you can increase your overall yield to about 10 per cent. At zero risk.

Likewise, the five-year RBI Relief Bond, likely to be relaunched with a lower coupon rate of 7 per cent, payable semi-annually, offers a post-tax yield of 10 per cent. There’s an investment limit of Rs 2 lakh on this bond, but investments beyond that limit can be made in the RBI Savings Bond, likely to yield 6 per cent.

So, despite the erosion in small savings interest rates, they still retain points of interest. And if that’s not consolation enough, take heart from the experience of Japan, which is caught in a deflationary spiral. Fears over the solvency of local banks have led the Japanese to park their money in large overseas banks, which charge customers to take deposits. That is, customers get negative returns on their savings!