Sept withdrawals push PPF deposits into red

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New Delhi, Nov 6: It isn’t only mutual funds and non-banking financial companies that are facing redemption pressure. The government-run Public Provident Fund (PPF)—the single-largest fixed-income scheme in the country—has also suddenly registered a spurt in withdrawals. PPF deposits have shrunk by over Rs 6,700 crore in September alone. Contrast this with the deposit inflow of Rs 5,072.39 crore for the first five months of this fiscal.

As a result of the massive withdrawal, the year’s PPF corpus stands at (-)Rs 1,766.10 crore, according to the latest controller general of accounts data. The PPF is one of the best indicators of household savings trends. It is also the most robust long-term savings instrument in the economy with a 15-year tenure; its ease of liquidity, unlike term insurance plans, makes it a favourite with the middle class.

The huge PPF redemptions are in line with the flight from all other financial sector investments. Investors are battling high interest rates on housing, automobiles and credit cards that have eaten into their consumption baskets. The withdrawal reflects the scramble to avoid payment defaults on monthly instalments. The meltdown in capital markets has further added to the pressures on the overall savings basket of the middle class.

The Prime Minister’s Economic Advisory Council has also noted that savings were expected to decline to 34.5% in the current fiscal. “Consequently, for the first time in recent years, the overall savings rate will be significantly lower than the investment rate,” the EAC’s Economic Outlook for 2008-09 says.

“It appears counter-intuitive. This is probably the worst time to take money out of the PPF,” says Rajesh Chakrabarti, assistant professor of finance, Indian School of Business. “There could be a liquidity squeeze at the retail level and people are withdrawing funds to meets their immediate needs.”

“Given that inflation is at 10.7%, the PPF actually offers a negative rate of interest at 8%, tax free. Also, banks are offering much higher interest rates on fixed deposits and so the incentive to hold money in PPF is not very strong,” points out DK Srivastava, director, Madras School of Economics.