First time in 48 years, PPF rate could fall below 8%

For the first time since the Public Provident Fund was established in 1968, the interest rate on the government-managed saving scheme could fall below 8%. Interest rates on small savings schemes, including the PPF and the Senior Citizens' Saving Scheme, are linked to the government bond yields and are revised every three months. The last interest rate revision on 19 March saw the PPF rate being cut 60 basis points from 8.7% to 8.1%. 

Now, given that the average 10-year benchmark bond yield has been nearly 7.5% between March and May, analysts believe the rate for PPF could be cut to 7.75%. "The PPF rate is 25 basis points higher than the 10-year benchmark bond yield. So it could be revised to 7.75% for the next quarter," says Manoj Nagpal, CEO of Outlook Asia Capital. If the PPF rate is indeed cut by 25-35 basis points, this would be the first time that the scheme will give less than 8% in its 48-year history. 

However, some experts believe that despite the decline in bond yields, the government will not cut the small savings rate in this quarter. "Given the furore over the rate cut in March, the government may not want to alienate the middle class before the assembly elections in 2017," says a mutual fund manager. 

Analysts point out that even if rates are cut, the PPF would still be a good investment due to the low consumer inflation. Though consumer inflation edged up to 5.76% in May, the PPF will still deliver 2% real rate of return. "PPF offers tax-free returns. It should be the instrument of choice for those in the highest tax bracket," says Mumbai-based financial advisor Amol Joshi. 

If interest rates on small savings schemes are cut, senior citizens will be the worst hit. The interest rate of the Senior Citizens' Saving Scheme was reduced from 9.3% to 8.6% in March. It could now recede to 8.25%. An investment of Rs 10 lakh earned them a quarterly pension of Rs 23,250 till last year. Now it will pay only Rs 20,625. 

Source : The Economic Times