Over 100 bps cut in PPF rate mooted, tax boost to equity investment likely

New Delhi, February 22: | Updated: Feb 23 2002, 05:30am hrs
An interest rate cut on public provident fund (PPF) by over 100 basis points (bps) may be announced by Union finance minister Yashwant Sinha in his Budget speech next week. Informed sources said the finance ministry was, in fact, pitching for a 100 bps to 200 bps cut in the PPF rate.

The capital market may also get a booster dose with possible long-term capital gains tax relief on equity investments. Long-term gains would imply investments made for over a year at least. However, the finance ministry has decided against scrapping the RBI India Relief Bonds scheme for now, despite actively considering the Y V Reddy panels recommendation on the matter. Sources said that the Reserve Bank of India( RBI) had advised against the move as it could generate widespread resentment among small investors. The interest rate cut on PPF in the next Budget would make it two major cuts in a row. Finance minister Yashwant Sinha had reduced the administered interest rates by 150 basis points in the Budget for 2001-02. As a result, PPF interest rate has already gone down from 11 per cent to 9.5 per cent.

The move to cut interest rate on PPF further follows Mr Sinhas announcement in the 2001-Budget to explore a better system for determining administered interest rates, and setting up of a committee under RBI deputy governor Dr Y V Reddy to look into the matter.

The panel in its report had suggested benchmarking of the rates with the yields on government securities of similar maturity periods.

Considering the fact that yields on government securities with maturity periods of five to 10 years is currently ranging between 7-7.5 per cent, benchmarking of the PPF interest rates with them, as per the Reddy panels recommendation, would mean at least a 200 basis point cut in the current interest rate. Simultaneously, sources said, interest rate on small savings might be reduced in the similar fashion in the Budget as recommended by the Reddy panel.

On the various small savings instruments, the committee has recommended that the interest rate on one-year postal deposit may be benchmarked to the average yield of 364-day Treasury bills traded in the secondary market, during the previous year. For post office savings bank accounts, the recommendation is that the present rate of 3.5 per cent may continue so long as the inflation rate rules above 3.5 per cent or the savings bank deposit rate of commercial banks is not below 3.5 per cent.

The committee has said that the interest rates on PPF could be benchmarked to the average secondary market yield on government securities having a residual maturity of around 10 years.

In the case of all non-bearer certificates, the interest rates should be marginally higher (lower) than the five-year postal deposit rate, depending upon the maturity of the instruments, it has suggested. For bearer instruments like Kisan Vikas Patra, the interest rate should be on par with non-bearer certificates after removing the transferability feature of this instrument, the panel has recommended.