On 30th Sep 2022, the RBI increased the rate at which it lends money to commercial banks (the repo rate) from 5.4 % to 5.9%. See RBI repo rate history from June 2000 to the present. A reader asks, “why did the govt. not increase PPF and SSY interest rates?”
The REPO rate is at the short end of the debt spectrum, while PPF and SSY rates are linked to long-term bonds. The two are not directly related. Short-term rates are determined by policymakers, while long-term rates and dependent on demand vs supply.
To appreciate the basics, see: Understanding Repo Rate and Reverse Repo rate and Explained: Why did RBI increase the REPO rate? How will it impact debt mutual funds?
In Feb 2016, the Govt agreed and decided to recalibrate the interest rates of all small savings schemes “every quarter to align the small saving interest rates with the market rates of the relevant Government securities.”
This was done after several committees discussing the future course of small saving schemes have recommended to the government for years now that it can no 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.
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The 10-year government bond is usually considered the benchmark for PPF and the Sukanya Samriddhi Yojana (SSY). Sukanya Samriddhi Yojana (SSY) is supposed to have a rate of 0.75% more than over “prevailing 10Y bond market rates” and PPF a 0.25% higher return.
Typically, the rate has not decreased as quickly as it should. See: Worried about 7.1% PPF interest rate? It is higher than what it should be! Also, see: Why are PPF and Sukanya Samriddhi interest rates still so high?!
PPF interest rates compared with three-month averages of 10-year and 15-year gilt bond yields are shown below (data updated until Jul-Sep 2022).
- 10-Y yields: The May, June, and July three-month average (source in.investing.com) was 7.395%
- 10-Y yields: The average of July, August, and September is 7.302%.
- 15-Y yields: May, June, and July average is 7.612%
- 15-Y yields: July, Aug, Sep three-month average is 7.472%
- This cool-off has likely prompted the govt to keep the PPF and SSY rates unchanged.
We must remember that the government kept the PPF rate at 7.1% for several quarters even though 10Y and 15Y yields were much lower. The PPF rate was announced as 6.4% (a drop from 7.1%) for the second quarter of 2021 and then reversed. Therefore it is only fair that the PPF and SSY rates remain the same, especially because of the yield cooling.
It must be understood that a rate hike is no cause for joy as a high inflation rate implies more cash outgo. Beating inflation would become so much harder then. It would be wise not to rely too much on small saving schemes. See: PPF will not make us crorepatis! We need to take risks for that!
Additional Resources:
- Want to invest Rs. 1.5 Lakh in PPF each year? Don’t be in a hurry!
- Why I maximized PPF investment only after ten years
- This useful feature of PPF deserves more attention!
- PPF Interest Rate History 1968 to Present