PPF returns 41 bps behind formula rates
The Hindu
PPF and recurring deposits are still out of sync with a formula-based rates regime for small savings schemes adopted in 2016.
Returns on the Public Provident Fund (PPF), frozen at 7.1% since April 2020, should have been pegged at 7.51% for this quarter as per the formula-based rates regime for small savings schemes adopted in 2016, Reserve Bank of India (RBI) calculations showed.
The government has raised the rates offered for most small savings instruments (SSIs) in the range of 40 basis points (bps) to 150 bps over the last five quarters. One basis point equals 0.01 percentage point. “With these revisions, the actual interest rates on most SSIs are now better aligned with the formula-based rates,” the RBI, which has hiked interest rates by 250 bps since May 2022, noted in its monetary policy report for October.
However, two small savings schemes’ returns are still out of sync with the formula. The PPF rate now trails the formula-based rate by 41 bps. For recurring deposit (RD) accounts, whose returns were raised to 6.7% for this quarter, the formula-based rate is higher at 6.91%.
With government bond yields hardening over the past month, economists say there may be some room for further hikes in the small savings rates in the penultimate quarter before the general election, that is, the January to March 2024 quarter.
Small savings rates had been hiked significantly ahead of the last Lok Sabha election in January 2019, when the PPF rate was raised to 7.9%. In April 2020, these rates were cut across the board, and a further 40 to 110 bps reduction was announced for the April to June 2021 quarter, but was then withdrawn immediately.
While correcting most schemes’ returns gradually in each quarter since October 2022, the government has held back hikes for the PPF, with officials pointing to the tax-free returns they offer, unlike other SSIs. The rate offered on the Sukanya Samriddhi Account scheme, which offers tax-free returns as well, was raised to 8% this April.
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