Why the interest rate of PPF, Sukanya Samriddhi, Senior Citizens Savings Scheme may increase soon?
According to data from Investing.com, the benchmark 10-year bond yield has been consistently above 7 percent since April 2022. It averaged 7.31 per cent in June to August 2022.
According to the formula notified by the Finance Ministry earlier through a press release dated March 18, 2016, the PPF interest could increase to 7.56 per cent in the coming quarter. (Average three months income by G-Sec+25 basis points). At present, the interest rate on PPF is 7.1 percent.
Similarly, the interest rate of Sukanya Samriddhi Scheme The current 7.6 per cent interest rate may soon jump to 8.3 per cent. (Average three-month yield by G-Sec + 75 basis points). Also, small savings interest rates have been set for review by the end of this month.
However, it needs to be mentioned that the government does not always immediately adjust the small savings rates as per the formula. There is often a large gap.
The interest rates of small savings schemes were last revised in the April-June 2020 quarter. Since then, interest rates have remained unchanged until September 2022. However, a significant increase in government yield in recent months may indicate an increase in the interest rate of small savings schemes in the near future.
How are the interest rates for PPF, Sukanya Samriddhi accounts, other small savings schemes calculated?
As per the press release mentioned earlier by the Finance Ministry, the interest rates of small savings schemes align with the yields of Government Securities (G-Secs) of similar maturity. According to the release mentioned by the Finance Ministry, the central government reviews the interest rate of small savings schemes every quarter on the basis of the G-Sec yield of the last three months. This is in line with the recommendations of the Shyamala Gopinath Committee, 2011 to ensure that interest rates of small savings schemes are market linked.
Interest rates for small savings schemes are linked and reviewed to market returns on government securities, fixed at spreads of more than 0-100 basis points (100 basis points = 1 per cent) on a quarterly basis and Above G-Sec yields of comparable maturity, as per the Reserve Bank of India (RBI).
The sources were recommended by the Shyamala Gopinath Committee in 2011. According to the formula notified by the Finance Ministry in 2016, PPF has a spread of 25 basis points, Sukanya Samriddhi Yojana has a spread of 75 basis points and Senior Citizen Savings Scheme has a spread of 100 basis points. The panel suggested annual revision, but the government had decided to review the rates quarterly from April 2016.
It should be mentioned that the prescribed formula is not always being followed. There have been many instances in the past when the central government did not revise the rates of PPF, Sukanya Samriddhi and other small savings schemes even after changing the G-Sec yield.
Interest rates for small savings schemes are due for review on September 30. The rates applicable for the October-December quarter of the financial year 2022-23 will be after review and will change only if revised otherwise the existing rates will continue. The interest rate for small savings schemes for the third quarter of FY 2022-23 is expected to be announced around September 30. It will be interesting to see whether the central government will follow the Gopinath formula for setting interest rates this time.