However, the interest rate of the Public Provident Fund (PPF) has been unchanged since April 2020. Will the Central Government hike interest rates of post office schemes, including the PPF, for the October-December quarter? Let’s find out what experts suggest.
How are the interest rates of PPF, Senior Citizen Savings Scheme, and Sukanya Samriddhi Account calculated?
To know whether there will be a hike in post office schemes for the October-December quarter, you need to understand how the interest rates are calculated first. The interest rates of these small savings (PPF, SCSS and SSY) schemes are linked to market yields of the 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 has a spread of 25 basis points over the benchmark yield. The benchmark 10-year bond yield has averaged 7.14% from June to August 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 7.39%. 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 7.89% for the October-December quarter. For the July-September quarter, the interest rate of the Sukanya Samriddhi Yojana is 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 8.14% for the October-December quarter. For the July-September quarter, the interest rate of the Senior Citizens Savings Scheme is 8.2%.
Will PPF, Sukanya Samridhhi, SCSS interest rates go up during the October-December quarter?
As there is no significant change in the rates of 10-year G-Sec yield, the interest rates of small savings schemes are largely likely to remain unchanged during the October-December quarter. “PPF, NSC, SCSS, and other small savings schemes follow the benchmark ten-year G-Sec yield in the secondary market for the last quarter. During the April-June 2023 quarter, this yield was in the range of 6.9%-7.3%. It has stayed around the same levels of 7.0%-7.2% in the ongoing Jul-Sep quarter. Since there is no significant change in the benchmark rate, any hike in the interest rate for small savings schemes is unlikely. However, considering upcoming assembly and center elections, there is still a slim chance that the Government may increase rates for small savings schemes,” says Anshul Gupta, Co-founder and Chief Investment Officer, of Wint Wealth, an online investment platform.
Echoing the same, Vishal Dhawan, a SEBI-registered RIA and Founder of Plan Ahead Wealth Advisors said, “There will not be any change in small savings rates this quarter as rates were raised last quarter, and long-term Government Securities rates are currently in the same range as they were at the end of June.”
As the interest rates of PPF have been kept unchanged since April-June 2020, investors are eagerly waiting for a hike. Most of the small savings’ schemes saw an upward revision during the last few quarters, except the PPF. So, is it finally the turn of the PPF to see an interest rate hike? Answering this, Dev Ashish, a SEBI Registered Investment Advisor and Founder of StableInvestor.com. said, “Given that the Central Government has not changed the PPF rates since April 2020 (when it was cut from 7.9% to 7.1%), there remains an ever-growing concern among PPF account holders about this. Like last quarter, the possibility of a PPF finally getting a rate hike remains.”
Even if the PPF interest rate goes up in Dec quarter, it will be a modest one: Experts
There is a little change that the Central Government may revise the interest rate of PPF during the upcoming review. Even if the Government increases the PPF interest rate, it will be a modest one, according to many experts. “Even if the rates are increased, they may not increase it by too much and instead go for a few basis points increase. The reason is that given the huge size of PPF funds, any big hike in interest rate will lead to a higher interest burden for the government. So, it is possible that if they do go for an increase, it might be a conservative one in a small range of 0.10% to 0.50% (i.e., 10 to 50 basis points hike),” Dev Ashish adds.
If the Central Government changes the interest rate on small savings, then it might raise the interest rate of PPF by around 25 basis points, says Abhishek Kumar, a SEBI Registered Investment Advisor and Founder of SahajMoney.
“With high inflation and the elections next year, the interest rates of PPF may see a reset this time. We are expecting at least a 25-50 basis points increase which is long due,” said Vivek Banka, Co-Founder, GoalTeller.