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PPF interest rate may see an increase amidst rising g-sec yield – Here’s why

The interest rates on small saving schemes are administered rates and are linked to market yields on G-secs with a lag and are fixed on a quarterly interval

PPF interest rate may see an increase amidst rising g-sec yield – Here’s why
Several times in the past, the government had not reduced rates of PPF, NSC, and other investments in spite of the g-sec yield falling.

The public provident fund (PPF) interest rate may see an upward revision soon. Currently, the PPF interest rate is 7.1 per cent while the G-sec yield has already crossed 7 per cent. In January 2022, the yield was at 6.5 per cent and had crossed 7.6 per cent in June. For the last nine quarters till September 2022, the interest rates on various small savings investments have been left unchanged.

With the upward movement in G-Sec yields, the spread between the existing interest rates on various small savings investments and the formula-based rates is now negative for most small saving schemes.

There is a direct correlation between small savings investments and the g-sec yield. The interest rates on small saving schemes are administered rates and are linked to market yields on G-secs with a lag and are fixed on a quarterly interval at a spread ranging from 0-100 bps over and above G-sec yields of comparable maturities. Based on the average G-sec yield, the government at the start of every financial quarter sets the interest rate on small savings.

Going forward, the investors of small savings products including National Savings Certificates, KVP, Time-deposits, Public Provident Fund, Senior Citizens Savings Scheme, and Sukanya Samriddhi Yojana may see an increase in the rates of their investments.

In the case of PPF, the rate is 25 bps higher than the average yield. Here is how the PPF rate is to be aligned to the g-sec yield. If the Average G-sec Yield (Per cent) of Corresponding Maturity (June 2019 to August 2019) is 6.81, then the Formula-based Rate of Interest (Per cent) (applicable for October to December 2019) will be 7.06, as there is a 25 bps spread for PPF.

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However, at times when the yield falls, the small savings rates are not cut by the government. Several times in the past, the government had not reduced rates of PPF, NSC, and other investments in spite of the g-sec yield falling.

The average G-sec yield over the previous quarters will determine the new rate for the next quarter – October to December 2022. It remains to be seen how the government responds to rising yields and offers some respite to small savings investors or not.

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