Why government is unlikely to cut PPF interest rate sharply

Interest rates on small savings schemes are due for recalibration next week, but analysts believe the government might avoid making steep cuts.

The average yield of the 10-year bond, which determines the PPF rate, fell 20 basis points in the Jul-Sep quarter.
Interest rates on small savings schemes are due for recalibration next week, but analysts believe the government might avoid making steep cuts. Small savings rates are linked to the prevailing yields in the bond market. In the July-September quarter, the average bond yield is roughly 20 basis points lower than the previous quarter. But the small savings rates may get cut by barely 10 basis points. “The fuel price hike is already facing opposition and a big reduction in the rates for small saving schemes can increase resentment among common investors,” says Monika Chopra, who teaches at International Management Institute.

A 10 basis point cut will reduce the PPF rate to 7.7%, the lowest in 37 years. PPF rates have progressively come down in the past two years, mirroring the decline in bond yields. Advisers say the PPF is still a better bet than bank deposits and corporate bonds because of its tax-free status Besides, consumer inflation is still very low at 3.6%, which means the PPF continues to offer a healthy real return of more than 4%.

The average yield of the 10-year bond, which determines the PPF rate, fell 20 basis points in the Jul-Sep quarter



Even so, salaried investors covered by the Employee Provident Fund can expect better returns elsewhere. They can increase their PF contribution through the Voluntary Provident Fund (VPF) which offers 8.65%. Like the PPF, the VPF also offers tax deduction under Sec 80C and the corpus is tax free. In most companies, employees can give the VPF mandate twice in a year—once at the beginning of the new financial year in April and again in the first week of October. So, this may be the best time to opt for the VPF if you want to earn higher returns than the PPF.

If rates are cut, senior citizens will be the worst hit. The interest rate of the Senior Citizens’ Saving Scheme has declined from 9.5% three years ago to 8.3%. It could fall further to 8.2% now.
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