Why didn’t PPF and SSY rates increase in Q3 amid the repo rate uptrend?

Amid rising repo rates, the government raised rates by up to 30 bps on some small savings schemes in the third quarter (October to December) of the current fiscal year or fiscal year 23. 2 year and 3 year term deposits, Senior Savings Program (SCSS), Kisan Vikas Patra (KVP), Post Office Monthly Income Account, etc., have increased interest rate. Despite the fact that bond yields have surged over the past 6 months and the fourth repo rate hike in five months, there has been no change in interest rates for Sukanya Samriddhi Yojana (SSY), Public Provident Fund (PPF) and National Savings Certificate (NSC) in Q3FY23.

The 10-year benchmark yield on government bonds, often referred to as government securities or G-seconds, is used to calculate interest rates on small savings programs. And on a quarterly basis, the government evaluates these rates based on the g-second average yield over the previous three months. On the other hand, to keep inflation under control, the Reserve Bank of India (RBI) chose to raise the repo rate again, this time by 0.5% to 5.9%, during its monetary policy meeting on September 30. This is the fourth time. The five-month repo rate hike in a series of increases that began on May 4 of this year and is now totaling 1.9%. Since repo rates are rising and bond yields are soaring, it’s important to understand why PPF and SSY rates aren’t rising.

Shravan Shetty, Managing Director, Primus Partners said, “The PPF and SSY ratios are tied to the long-term trend, while the repo rates are at the low end of the debt range and the two ratios are unrelated to the long-term trend. together. Normally, the repo rate would change less, but due to the pandemic and inflation cycle, we are seeing more changes in the repo rate to quell inflation. Today, the repo rate stands at 5.9% after the recent rally and just hit pre-pandemic levels. The PPF rate doesn’t reflect the repo rate when it goes down, so it doesn’t need to reflect when the repo rate goes up. Due to inflation, PPF and SSY rates should be raised for long term investment to avoid value destruction for better returns. Traditionally, inflation should be at 4% and interest rates at 7%, so there is a stark difference. The repo rate should not drive PPF and SSY, the decision to raise rates should be related to inflation expectations above 4% as required by the RBI. As a result, PPF rates will increase as long-term inflation is expected to stay above 4% for some time. “

Since Q1 to March 2019, the small savings interest rate has not increased so far. In Q3FY23, interest rate for Senior Savings Program was increased from 7.4% to 7.6%, for Kisan Vikas Patra from 6.9% to 7% and for Income Account Program monthly from 6.6% to 6.7%. The government has announced an increase in the interest rate on 2-year Postal deposits by 20 basis points, from 5.5% to 5.7%, and 3-year Postal deposits by 30 basis points, from 5.5% to 5.8%.

The views and recommendations expressed above are those of individual analysts or brokerage firms, not those of Mint.

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