Will PPF interest rate be finally hiked in 2024 after remaining unchanged since April 2020? The interest rates of small savings schemes are linked to yields of 10-year Government Securities in the secondary market. There are set formulae for mark-ups over the previous three months average yield of relevant G-Secs of comparable maturity. Let's see if you are in for a New Year bonanza from the Central Government this time
Will you get more interest from your Public Provident Fund (PPF) account from next year? The interest rate of PPF has remained at 7.1% since April 2020. Meanwhile, the interest rates of various other small savings schemes including Senior Citizen Savings Schemes (SCSS), National Savings Certificate (NSC), and Sukanya Samriddhi Yojana (SSY) have jumped in the last few quarters. Interest rates of small savings schemes are due for revision at the end of this month. Let's see if you are in for a New Year bonanza from the Central Government this time.How interest rates of PPF, Senior Citizen Savings Scheme, and Sukanya Samriddhi Account are calculated
First, let's understand how the interest rate of PPF is calculated.The interest rates of small savings schemes are linked to yields of 10-year Government Securities in the secondary market. There are set formulae for mark-ups over the previous three months’ average yield of relevant G-Secs of comparable maturity. The central government reviews the interest rates of small savings schemes every quarter based on the G-Secs yields of the previous three months. This is in line with the recommendations of the Shyamala Gopinath Committee, 2011 to ensure that the interest rates of small savings schemes are market-linked.
As per the formula notified by the Finance Ministry in 2016, PPF interest rate in a given quarter has a spread of 25 basis points over the benchmarked yield of preceding three months. The benchmark 10-year bond yield has averaged 7.28% from September to October 2023, according to data from investing.com. Going by the formula, the interest rate of PPF will be 25 basis points higher than the average 10-year G-sec yield. So going strictly by this process, the PPF interest rate should ideally be around 7.53% for the January-March quarter.
However, the Central Government has not raised the PPF rate despite the formula suggesting a higher rate in many previous quarters.
The Sukanya Samriddhi Yojana has a spread of 75 basis points. So, going by the formula, the interest rate of Sukanya Samriddhi Yojana should be around 8.03% for the January-March quarter. For the December quarter, the interest rate of the Sukanya Samriddhi Yojana is already 8%.
Similarly, the Senior Citizens Savings Scheme (SCSS) has the biggest spread of 100 basis points. So, going by the formula, the interest rate should be around 8.28% for the January-March quarter. For the October-December quarter, the interest rate of the Senior Citizens Savings Scheme is 8.2%.
Will PPF, Sukanya Samridhhi, SCSS interest rates go up during the January-March quarter?
As you can see the rates of Sukanya Samriddhi Yojana and Senior Citizens Savings Scheme are already in line with the recommended formula. So, it is unlikely that there will be any upward revision in the interest rates of these two popular post office schemes. Now, what about the interest rate of PPF? Answering this, Nirav R Karkera, Head - of Research, Fisdom, says. "Rates were held in the last quarters despite a formula-driven case for an increase citing an effective adjustment against tax benefits. At the same time, yields on government securities have increased meaningfully since the last rate reset for PPF investments. Also, rates for other small saving instruments have been aligning with respective formula-driven expectations. Meanwhile, interest rates on PPF investments have not been able to keep pace either with the rate environment, peer instruments, or expectations basis the formula. Considering most other perspectives constant, the case tilts in favour of a rate reset, to a higher rate. Such an outlook would be highly sensitive to any surprises on the policy rate front."
However, the chances of a PPF rate hike during the January-March quarter are very thin. Abhishek Kumar, a SEBI-registered financial adviser and Founder of SahajMoney.com says, "Although the PPF rate has not been revised since April 2020 and is at 7.1% currently looking at the 10-year G-Sec yield for the last three months, which after rising in October is trending lower in recent months, it’s highly unlikely that Finance Ministry is going to revise it for January-March quarter.
Ajinkya Kulkarni, Co-Founder and CEO, of Wint Wealth, "PPF tracks the benchmark ten-year G-Sec yield in the secondary market for the last quarter. During the October-Dec 2023 quarter, this yield has stayed around 6.9%-7.3%. Since there is no significant change in the benchmark rate, any hike in the interest rate for small savings schemes doesn't look possible." He adds, "However, considering the upcoming center elections, there is a small possibility that the Government may increase rates for small savings schemes."
"Still considering election next year the Central Govt might throw in a surprise for small savers and raise the PPF interest rates by 25 basis points," Kumar adds.
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This story originally appeared on: India Times - Author:Faqs of Insurances
