Get ready for a hike in PPF and NSC interest rates

Stock markets are down and cryptos have crashed, but Post Office schemes could make investors smile. Government bond yields have risen sharply in the past one year, raising hopes that the interest rates of small savings schemes linked to these bonds will be hiked. The formula laid down by the Gopinath committee in 2011 says small savings rates should be 25-100 basis points higher than the average yields of government securities of the same duration. The benchmark 10-year bond yield has risen 140 basis points from 6.04% to 7.46% in the past 12 months. It has averaged 7.31% in the April-June quarter. Going by the formula, the PPF rate should be hiked to 7.81%, while the and the Senior Citizens’ Saving Scheme should offer more than 8% (see table).

If small savings rates are hiked, investors in the RBI floating rate bonds also stand to benefit. The interest rate of these bonds is linked to that of NSC's. They offer 35 bps more than NSC's. The prevailing rate of NSC's is 6.8%, so the RBI floating rate bonds are offering 7.15%. If the NSC rate is hiked to 7.15%, the interest rate of these bonds will go up to 7.5%, which is higher than what bank fixed deposits are currently offering.

However, the formula has not always been followed to the T in the past. In the January-March 2021  The quarter, average 10-year bond yield was less than 6%, which means the PPF rate should have been around 6.25% while the Senior Citizens’ Saving Scheme should have given no more than 6.75%

Accordingly, the interest rates were reduced in March 2021. The PPF rate was cut to 6.4%, the Senior Citizens’ Savings Scheme to 6.5% and the PPF to 6.7%. It caused a huge uproar, forcing the government to roll back the reduction. Small savings rates have remained untouched since then.

Now that government bond yields have gone up significantly, the government might hike the small savings rates. Whether this hike will be as per the Gopinath committee formula is yet to be seen.

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