The government may raise the interest rate for PPF and other small savings schemes on September 30; here’s why

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There is strong speculation that the government may finally raise interest rates on small savings schemes such as the Public Provident Fund (PPF), Sukanya Samriddhi Savings Scheme, Senior Citizen Savings Scheme (SCSS ) and the National Savings Scheme (NCS) at the next rate review. September 30.

Notably, the interest rates on this small savings are calculated based on the yields of government bonds also called government securities or G-sec. The government reviews these interest rates quarterly against the average g-sec yields over the past three months.

The benchmark 10-year yield has been above 7% since April 2022 and averaged 7.31% from June to August 2021, which argues for a rate review at the next review.

According to a formula for calculating interest on PPFs communicated by the Ministry of Finance on March 18, 2016, interest on PPFs may increase to 7.56% over the October-December quarter. The interest rate of the PPF is 25 basis points higher than the average yield of the G-sec over 3 months. Currently, the PPF gives 7.1%.

Similarly, the Sukanya Samriddhi Savings Scheme interest rate is expected to be 75 basis points above the G-sec yield, but the SSA is currently giving 7.6%. The Senior Citizen Scheme interest rate is 100 basis points above the average three-month G-sec yield.

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However, in practice, the government revises interest rates, based on the above formulas, after a significant lag. Interest rates for small savings plans have remained unchanged since September 2020; they were revised downwards in the last quarter of April-September 2020. Now that bond yields have been high for some time, interest rates for small regimes could be revised upwards.

According to the Reserve Bank of India, small savings schemes are linked to G-sec market returns with a lag and are reset quarterly at a spread ranging from 0 to 100 basis points and above G-sec returns of comparable maturities.
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