PPF Returns Still Languishing Lower than Formula-Based Rates

PPF Returns Still Languishing Lower than Formula-Based Rates

Sub: Eco

Sec: Monetary Policy

• Interest Rates Below Formula-Based Rates:
  • The Public Provident Fund (PPF) and five-year recurring deposits (RD) are earning rates lower than the formula-based system adopted since April 2016.
  • PPF Rate Static at 7.1% since April 2020.
  • Five-Year RD Rate gradually increased from 5.8% to 6.7% in the first three quarters of 2023-24.
• RBI’s Observation:
  • RBI noted that PPF returns were 41 basis points (bps) lower than the formula-based rates for October to December 2023.
  • Five-year RD rates were 21 bps lower than the formula-based rates for the same period.
• Formula for Quarterly Rate Resets:
  • A panel led by former RBI Deputy Governor Shyamala Gopinath linked small savings rates to secondary market yields on government securities of comparable maturities.
• Historical Rate Adjustments:
  • Last PPF rate hike in October 2018 to 8%, reduced to 7.9% in July 2019, and further slashed to 7.1% in 2020-21.
  • Government reduced rates on all small savings instruments in the range of 50 to 140 bps at the onset of 2020-21.
• Recent Rate Hikes Before Elections:
  • Sukanya Samriddhi Account Scheme (SSAS): Rate raised from 8% to 8.2%.
  • Three-Year Time Deposit: Rate increased from 7% to 7.1%.
  • No changes in PPF rate despite successive rate hikes on other small savings schemes.
• Current Status:
  • Rates on most small savings schemes are aligned with formula-based rates except for PPF and five-year RD.
  • The gap between the formula-based rate and the PPF and five-year RD rates was not quantified in the latest RBI report.
• Tax-Free Scheme Defense:
  • Finance Ministry defends PPF rate stasis by emphasizing its tax-free status, offering higher tax-adjusted returns.
  • Similar tax treatment for SSAS, which had its rate frozen at 7.6% from April 2020 to March 2023, then raised to 8% last April and 8.2% from January 2024.