News: PPF rate may fall below 7% to a 46-year low-24/06/2020
Updated On: Jun 24, 2020
PPF rate may fall below 7% to a 46-year low
Investors should brace for something that has not happened since 46 years—the Public Provident Fund (PPF) rate falling below the 7% mark. The consistent decline in bond yields means the rates of small savings schemes are likely to be cut when they come up for the quarterly revision next week. If rates are cut as expected, this would be the first time since 1974 that the PPF rate will fall below 7%.
The interest rate of small savings schemes are linked to government bond yields of the same maturity. The PPF rate is linked to the 10-year government bond yield. The rate does not change on a daily basis, it is announced at the beginning of each quarter based on the average bond yield in the previous quarter. For the current April-June quarter, the rate was fixed at 7.1% at the end of March when the 10-year bond yield averaged 6.42% in the January-March quarter. In April, rates had been lowered sharply. The PPF rate was cut 80 bps from 7.9% to 7.1% and the Senior Citizens’ Savings Scheme rate was cut from 8.6% to 7.4%. The hugely popular NSCs also saw a big cut from 7.9% to 6.8% while the Sukanya Samriddhi Account Scheme rate was cut to 7.6% from 8.4% earlier. Interest rate on the Kisan Vikas Patra was lowered to 6.9%, which extended the maturity period by 11 months to 124 months. Since 1 April, the 10-year bond yield has till now averaged 6.07% and currently stands at 5.85%, which clearly means a rate cut is in the offing for small savings schemes. Investors need to act fast and lock themselves at higher rates before the rate cut. NSCs and KVPs bought before the rate cut will continue to give the contracted rate till maturity. Even the Senior Citizen Saving Scheme will give the same rate. But investments in the PPF and Sukanya schemes will get affected. The cut in small savings schemes' rates coincides with a secular decline in bank deposit rates. Short-term deposit rates are now very close to or even less than what savings rates. “With deposit rates dropping so low, we do see flows starting to move to other debt instruments such as tax-free bonds, sovereign gold bonds and even back to cash and debt mutual funds,” said Sandeep Das, head of Barclays Private Clients India.
But the decline in rates is not as catastrophic as it may seem. Consumer price inflation has remained below 7% in the past six months, which means that the small savings schemes are still yielding a positive real rate of return. However, the Covid lockdown has caused food inflation to spiral up to 9.28% in May. Fuel prices have also been going up, which could push up the overall inflation numbers.
