Why are PPF and Sukanya Samriddhi interest rates still so high?!

Published: September 30, 2016 at 11:17 am

Last Updated on

The government announced the interest rates for small saving schemes yesterday and surprising or should I say unsurprisingly, the interest rates of many schemes, especially the long-term ones like PPF and Sukanya Samriddhi are still too high! Why is the government not sticking to policy?

If you are surprised by the title in spite of the fact that rates have headed south this year, an explanation is provided below. But first, a look at the entire list of revised rates.

small-saving-rates-last-quarter-2016

Source: finmin announcement

Several committees that have discussed the future course of small saving schemes have recommended to the government for years now that it can longer set flat interest rates for these schemes and that these instruments must be linked to market rates at least once every quarter. Read more: The evolution of Public Provident Fund (PPF) Interest Rates.

On Feb 16th 2016, the government decided to implement this recommendation.

The 10-year government bond is usually considered as the benchmark for PPF and the newly introduced Sukanya Samriddhi Yojana (SSY).

SSY is supposed to enjoy a 0.75% higher return over “prevailing 10Y bond market rates” and PPF a 0.25% higher return. The table for determining market returns as given by above link is

small-saving-rates-chart

FIMMDA = Fixed income money market and derivates association.

The month end bond yields are given below (source S&P BSE and investing.com)

Date10Y bond yield15Y bond yield
30-06-20167.45%7.76%
29-07-20167.16%7.48%
31-08-20167.11%7.27%
Average7.24%7.50%

So as per the formula prescribed by the government, the current interest rate for PPF should be ~ 7.5% and SSY ~ 8%.

The actual rates are 0.5% higher than this. Hence the titular question.

The answer is obvious. The government does not seem inclined to follow the formula (it did not do so last quarter too) because very few of its citizens have the maturity to understand

why small saving scheme interest rates should be higher.

why interest rates are cyclic.

and why low-interest rates are good for both the individual and the country as a whole.

Sigh!

Here are the 10-year and 15-year bond yields that tell the story much better.

India 10-year bond yield

india-10-year-bond-yield
Source: S&P BSE 10Y bond index

India 15-year bond yield

india-15-year-bond-yield
Source: investing.com

 

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