Worried about low PPF interest rate? Here is why it could drop further

Published: February 10, 2021 at 10:43 am

The PPF interest rate for the current quarter is 7.1% (1st Jan 2021 to March 31st 2021). Many investors are worried and some even accuse the government of lowering rates and causing hardship. We should be aware that the PPF rate is almost 1% higher than what it should be!

How is the PPF rate set? Government policy decisions are not made by X party or Y party arbitrarily as people on social media claim. More often than not, a change in government policy is because an expert committee recommended it.

The most dramatic example is how the GPF was abolished for those who joined the government after 1st April 2004 and the NPS was introduced: How the power of compounding gave birth to the National Pension System.

Several committees that have discussed 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.

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 this image.  FIMMDA = Fixed income money market and derivates association. The 10Y rate is used because there should be lakhs of “old” PPF accounts (the scheme is renewable for life every five years).

small saving rates formula chart
small saving rates formula chart

To understand what the current PPF rate “should be” let us consider 10-Year and 15-Year G-Sec yields. For the Jan to March 2021 quarter, we need to look at yields between Sep to Nov 2020.

10-year G-Sec Yields

Sep-206.015
Oct-205.881
Nov-205.911

The average is 5.93%. PPF rate “ought to be” 5.93% + 0.25% = 6.2% The rate set is a good 0.9% above this at 7.1%. Thus the current gap between the actual rate and formulate rate is 0.9%. In March 2020 when the PPF rate fell by 0.8%, this gap was only 0.35%. The gap increased only because of the pandemic and should fall sooner than later.

See: PPF Interest Rate History 1968 to Present and Sukanya Samriddhi Yojana Interest Rate History 2015 to Present

Even if we consider the 15-year G-sec yield average over the above-mentioned duration is 6.37%. So add 0.25% to this the PPF “ought to be” about 6.6% – 0.5% lower than what it should be.

Retail inflation for India which kept increasing during the lockdown in 2020 dramatically decreased from 6.93% in Nov 2020 to 4.59%. This will help the government to gradually lower the gap between the actual rate and the formula rate.

As things stand now, PPF and SSY investors should expect lower interest rates – a step in the right direction for our country.  Investors unable to digest this should focus their anger and regret on their own lack of planning and lost time rather than the government.

There may be some quarter where the rates increase but “over the long term” returns will reduce and must reduce. There is no escape from this.


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