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Why did PPF and SSY interest rates not hike in Q3 amidst the repo rate uptrend?

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Amidst the uptick in repo rates, the government has increased the interest rates by up to 30 bps on a couple of small savings schemes for the third quarter (October to December) of the current fiscal year or FY23. The 2-year and 3-year time deposits, Senior Citizen Savings Scheme (SCSS), Kisan Vikas Patra (KVP), Post Office Monthly Income Account, etc., have experienced an increase in interest rates. Despite the fact that bond yields are already strong for the last 6 months and the fourth repo rate hike in five months, there has been no change in interest rates for the Sukanya Samriddhi Yojana (SSY), Public Provident Fund (PPF), and National Savings Certificate (NSC) in Q3FY23.

The benchmark 10-year yield of government bonds, commonly referred to as government securities or G-sec, are used to compute the interest rates on small savings schemes. And on a quarterly basis, the government evaluates these interest rates in light of the average g-sec yields for the previous three months. On the other hand, in order to control inflation, the Reserve Bank of India (RBI) chose to raise the repo rate once more, this time by 0.5% to 5.9%, during its monetary policy meeting on September 30. This is the fourth repo rate hike in five months in a sequence of increases that began on May 4 this year and now stood at a total hike of 1.9%. Since repo rates are rising and bond yields have been strong, it is important to understand why PPF and SSY interest rates have not risen.

Mr Shravan Shetty, Managing Director, Primus Partners said “The PPF and SSY rates are tied to long-term trends, while the repo rate is on the low end of the debt range and the two are not linked. Normally, the repo rate would have changed less, but owing to the pandemic and inflationary cycle we are seeing more changes in the repo rate to quell the inflation. Today, the repo rate stands at 5.9% after the recent hike and has just reached the pre-pandemic level. The PPF rates did not mirror the repo rate when it went down, so it is not necessary that it mirrors when the repo rate is hiked. Given the inflation, the PPF and SSY rates should be raised for a long-term investment to avoid value destruction so the returns are better. Traditionally inflation should be at 4% and the interest rates to be at 7% so there is a marked difference. The repo rate should not drive the PPF and SSY, the decision to raise the rates should be linked to the expectation of inflation which is over 4% as mandated by RBI. Hence, PPF rates should increase since long-term inflation is expected to be above 4% for some time.”

Since the January to March 2019 quarter, small savings rates haven’t increased till now. In Q3FY23, the interest rate for the Senior Citizens Savings Scheme has been increased from 7.4% to 7.6%, for Kisan Vikas Patra from 6.9% to 7%, and for the Monthly Income Account Scheme from 6.6% to 6.7%. The government has announced increases in interest rates for Post Office 2-year time deposits of 20 basis points, from 5.5 percent to 5.7 percent, and Post Office 3-year time deposits of 30 basis points, from 5.5 percent to 5.8 percent.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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