Sensex slump sees PPF surge

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Sustained high inflation has led to a major revival of middle-class India’s flagship savings scheme: the public provident fund (PPF). In just one month this year (April), deposits in India’s single-largest fixed-income scheme touched almost half the annual target of Rs 12,000 crore. Though this is massive in itself, given trends over the last two years, it is even more phenomenal.

In the same month of 2007-08, there was a net outflow from the fund of Rs 754.86 crore. Collections in the fund were budgeted at Rs 16,400 crore last year, but actual collections were only Rs 6,329 crore. There is a distinct possibility, said government officials who handle the fund, that total deposits in 2008-09 would exceed this year’s target handsomely.

Analysts said the surge in deposits could be attributed to the fact that one-year returns on the Sensex have fallen to a paltry 6%, prompting a shift of portfolios to fixed-income products.

While a rise in inflation hurts fixed-income assets as their real rate of interest declines, the bearish sentiment of stock market investors prompted them to choose debt over equity.

“We are revisiting the 1970s scenario of a ‘money illusion’,” ICICI Bank research head G Ramachandran said, referring to Money Illusion Theory, which says investors tend to undervalue firms in inflationary times if they do not account for the price rise effects on a company’s income statement.

Finance minister P Chidambaram said on Monday that corporate tax collections could be robust this year, too. Corporate tax receipts are a strong indicator of corporate earnings, as domestic companies make advance estimates of their annual profits and pay tax in four instalments.

The World Bank in its report, Global Development Finance, has lowered India’s GDP growth estimate for 2008 to 7%.

Credit Suisse said on Monday that the Sensex may fall to a ten-month low of around 13,000 points by the end of 2008, as RBI may raise interest rates to check inflation, which, according to the latest data, hit a record high of 8.24%.

The one-year return on the Sensex was just 5.72% as on June 10, 2008 when it closed at 14,889.25 points, down 177 points from the previous day, over the 14,083.41-point level on June 10 2007.