Why didn’t PPF and SSY interest rates go up despite the 0.5% repo rate hike?

On September 30, 2022, the Reserve Bank of India raised the money lending rate to commercial banks (repo rate) from 5.4% to 5.9%. See the RBI repurchase rate history from June 2000 to the present. The reader asks, “Why did the government. Not increase PPF and SSY rates?”

The short-term repo rate is in the debt realm, while the PPF and SSY rates are related to long-term bonds. The two are not directly related. Short-term rates are set by policy makers, while long-term rates are dependent on demand versus supply.

For an estimate of the basics, see: Understanding the Repo Rate and the Reverse Repo Rate Explanation: Why did the RBI increase the repo rate? How will it affect debt mutual funds?

In February 2016, the government agreed and decided to re-calibrate the interest rates of all small savings programs “every quarter to align small savings interest rates with market rates of relevant government securities”.

This was done after several committees that had discussed the future course of small savings schemes for years now recommended that the government should no longer be able to set fixed interest rates for these schemes and that these instruments should be linked to market rates at least once every quarter. Read more: Evolution of interest rates on the Public Provident Fund (PPF).

A 10-year government bond is usually considered the standard of PPF and Sukanya Samriddhi Yojana (SSY). Sukanya Samriddhi Yojana (SSY) is Supposed to You have a rate of 0.75% more than the “prevalent 10-year bond market rates” and a PPF of 0.25% higher yield.

screenshot from "Recalibrate interest rates for small savings programs 1.4.2016 on a quarterly basis to align small savings interest rates with market rates for relevant government securities"
Screenshot from “Recalibrate small savings interest rates on 1.4.2016 every quarter to align small savings interest rates with relevant government stock market rates.”

Usually, the rate did not decrease as quickly as required. See: Worried About PPF 7.1% Interest Rate? It’s higher than it should be! See also: Why are the interest rates for both PPF and Sukanya Samriddhi still so high?!

PPF rates compared to three-month averages of staggering 10-year and 15-year bond yields are shown below (data updated to July-September 2022).

PPF interest rate compared to the three-month average of impressive 10-year and 15-year bond yields
PPF interest rate compared to the three-month average of impressive 10-year and 15-year bond yields
  • 10 year returns: The three-month average in May, June and July (source in.investing.com) was 7.395%
  • 10 year returns: The average for July, August and September is 7.302%.
  • 15 year returns: May, June and July average is 7.612%
  • 15 year returns: The average of the three months in July, August and September is 7.472%
  • It is possible that this cooling off has prompted the government to keep the PPF and SSY rates unchanged.

It must be remembered that the government kept the PPF rate at 7.1% for several quarters even though the 10Y and 15Y returns were much lower. A PPF rate of 6.4% (down from 7.1%) was announced for the second quarter of 2021 and then Reverse. It is therefore fair that the PPF and SSY rates remain the same, especially due to the cooling of the crop.

It must be understood that raising the interest rate is not a cause for joy because a high rate of inflation means an increase in monetary spending. Overcoming inflation will be more difficult at that time. It would be wise not to rely too much on small savings schemes. See: PPF won’t make us cheer! We need to take risks for it!

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