How is PPF interest rate calculated?
To know whether there will be a hike in PPF interest during the July-September quarter, you need to understand how the interest rate 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.
Will the PPF interest rate go up in the July-September quarter of 2023?
As per the formula notified by the Finance Ministry in 2016, PPF has a spread of 25 basis points over the benchmark yield. The benchmark 10-year bond yield has averaged 7.3 per cent from March to May 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 of the corresponding maturity. So going strictly by this process, the PPF rate should ideally be 7.55%.
However, there has been a gradual decline in the benchmark yield which has raised doubts about the PPF rate hike possibility. “PPF typically follows the benchmark ten-year G-Sec yield in the secondary market for the last quarter. During the January-March quarter, this yield was in the range of 7.3-7.5 per cent. It further declined to the 7-7.1 per cent range in the April-June quarter. Given the 25 basis points fall in the benchmark, it is unlikely that we will see any hike in the PPF interest rates in the upcoming review,” said Anshul Gupta, Co-founder and Chief Investment Officer, of Wint Wealth, an online investment platform.
“Some of the small savings schemes were not marked to the market during the COVID years, and hence, the rates were higher than the markets. However, with the rate hikes in the last year, the interest rates on small savings schemes are currently at par with long-term FDs. The RBI has also paused rate hikes since April. Inflation seems to be coming down gradually and the expectation is that the repo rate would hold. So, there’s little to no headroom for an upward revision and the chances of a significant rate hike in PPF at this point seems unlikely”, said Adhil Shetty, CEO, BankBazaar.com.
The government has hiked the interest rates of a few small savings schemes by up to 70 basis points (bps) during the April-June quarter of 2023. The interest rates of select small savings schemes have also been raised between 20 basis points and 110 basis points during the January-March quarter of 2023. However, the interest rates of PPF have not been revised in almost three years. “Despite a consistent increase in policy rates, PPF rates have not seen a corresponding uptick. The rates were last reduced almost three years ago,” said Anand Dalmia, Co-founder & CBO of Fisdom, a wealth tech platform.
Though a significant hike may not happen, however, the interest rate of PPF can increase by 25 basis points, said another expert. “Government finances continue to be healthy (relatively). The gap and the attractiveness of PPF reduces more so in the new tax regime and individuals are finding it hard to invest in non-equity instruments. Keeping these factors in mind, the interest rate of PPF could see a slight increase in the upcoming quarter,” said Vivek Banka, Co-Founder, GoalTeller.
The interest rates for the small savings schemes are due for review on June 30, 2023. The rates will be applicable for the July-September quarter of FY2023-24.