PPF suffers fourth biggest Interest rate fall in its history!

The 0.8% drop in PPF interest rate for April-June 2020 is the fourth biggest drop in its history! A study of historical PPF rates.

Published: April 1, 2020 at 8:34 pm

PPF interest rate for Apr-Jun 2020 quarter fell 0.8% from 7.9% to 7.1%. This is the fourth biggest fall in its history. An analysis of PPF interest rate history.

We had shown yesterday for those worried about 7.1% PPF interest rate that It is higher than what it should be! A good 0.35% higher than 10Y gilt yield to be precise. First, let us look at the interest rate history of PPF and what we can infer from it

PPF Interest rate history

Source: The PPF rule book from nsiindia.gov.in and finance ministry circulars.

YearRate of Interest
PPF interest rate history from April 1968 to April 2020
PPF interest rate history from April 1968 to April 2020

Notice that the PPF rate has steadily increased since inception up to 1990, remained flat at an astonishing 12%, fell down sharply to 8% and after that increased a little in response to inflation in 2012-13 and then has been gradually on the way down.

The sharp increase from 5.8% to 7% in 1974 was most likely triggered by the four-fold increase oil prices due to an embargo triggered by Americal aid to Israel. Read more: 1973 oil crisis

After the inception, we have had the Bangladeshi liberation war (1971), the emergency (75-77) and Indias worst economic crisis ever – the balance of payments crisis (the Mid 80s- early 90s): 1991 Indian economic crisis.

Many investors look at the above graph and want to go back in time when the rate was 12% failing to recognise that the Indian government was near-bankrupt at that time arm-twisted by the IMF to open up its economy. This was also a period when the stock market was going through its lost decade when it was moving nowhere for ten years post the Harshad Mehta scam.

India was importing more than it was exporting. It had no forex reserves and it was on the verge of defaulting on payments. The IMF lent Indian 2 Billion USD with its gold reserve as collateral. The economy was opened up and the great Indian story was all set to begin … with a big hiccup.

As a result of the economic crisis, Indian’s creditworthiness failed. It is due to this, coupled with the need for increasing borrowing, the PPF rate shot up to 12%

It is a miracle that the government did not default on its debt during the 90s thanks perhaps only to the national small savings fund where all PPF and post office money lies.

In the early 2000s, the situation improved. Inflation fell sharply to ~ 5-6%. The govt dramatically dropped interest rates and the great Indian bull run began. Debt funds gave 15-17% returns because of the rate cut!!

  • In Jan 2000 the PPF rate was lowered by 1%. The highest ever at that time with a % change in the rate of 8.3%
  • In March 2001, the rate dropped by 1.5% (% change = 13.6^%!). This is the biggest drop till-date
  • In March 2003 another 1% drop (% change =11.1%)

An investor enjoying 12% in April 1999 was left starting at an 8% return just four years later! This triggered the stock market bull run until the 2008 US housing crisis hit the brakes on “India shining”.

The 0.8% drop in PPF rate announced for April to June 2020 is the fourth largest absolute change and third-largest percentage change (10.1%) in the history of the scheme. The circumstances of this change is, needless to stay unique and is unlikely to trigger a bull run in the stock market anytime soon. For that to happen, another “rate” that is exponentially doubling every five days has to slow down. Let us hope it does.



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