A reader wants to know,” Will the Public Provident Fund (PPF) interest rate be increased after three successive RBI repo rate hikes?”
The PPF interest rate does not directly depend on the RBI repo rate. Some history is in order to appreciate how small saving interest rates are decided. 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.
In Feb 2016, the Govt agreed and decided to recalibrate the interest rates of all small savings schemes “on a Quarterly Basis to align the small saving interest rates with the market rates of the relevant Government securities.”
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?!
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PPF interest rate compared with three-month averages of 10-year and 15-year gilt bond yields are shown below.
The government kept the PPF rate at 7.1% 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.
In the past few months, both bond yields have moved higher than 7.1%. To compensate for the revenue outgo due to the higher-than-expected PPF rate, the government may delay hiking PPF rates unless the long term yields are stubbornly higher than 7.1%.
If inflation is not controlled with these three repo rate hikes – see: Explained: Why did RBI increase the REPO rate? – then, the interest rate of small saving schemes may be increased for the Oct-Nov 2022 quarter.
The last three-month 10Y bond yields are (source in.investing.com)
- Jul 2022 7.320%
- Jun 2022 7.450%
- May 2022 7.415%
- Average: 7.395%
On Aug 5th 2022, the 10Y bond yield shot up by 2% after the RBI REPO rate hike. If the yield continues to increase and the three-month average goes past 7.5%, a PPF rate hike may be possible.
The last three-month 15Y bond yields are (source in.investing.com)
- Jul 2022 7.546%
- Jun 2022 7.653%
- May 2022 7.637%
- Average: 7.612%
If these averages remain high, a PPF rate hike is possible. However, it must be understood that this 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 on PPF
- 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
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