Jun 30, 2016 · 2 min read

Are Interest Rates On PPF Dropping Further Down?

You may not have earned sub-8% interest on your Public Provided Fund (PPF) ever. However, be ready to receive such a low interest for the first time this quarter. As the Interest rate on PPF is now linked to the movement of the Government’s 10-year benchmark bond, it may slip below 8% considering the average yield of 7.5% or thereabouts on the benchmark sovereign bond.

The Government cut interest rates on the PPF this March from 8.7% to 8.1%, and also made it clear that this will be reset every quarter. This move was intended to keep bank deposits competitive. Often banks blamed Government-run Small Savings Schemes (SSS) such as PPF and National Savings Certificates (NSCs) for making their deposits uncompetitive, as the Government has paid higher interest rates on them. Moreover, the frequency of it reshuffling the rates was lower, once in a year. The RBI Governor expected banks to pass on the benefits of rate cuts immediately to the borrowers for there being any possibility of further policy rate cuts. Banks felt their higher borrowing cost made it unviable for them to lower lending rates.

To solve this conundrum, the Government initiated the action of making interest rates on SSS more market-linked. Only time can tell whether it will slash the interest rates or hold them unchanged this time.

PersonalFN is of the view that, irrespective of whichever way the interest rates on the PPF goes, you should consider this as one of the most lucrative investment avenues to build your retirement kitty. Although the rates are moving down, the PPF still offers you tax benefits and pays compounded interest. Moreover, when inflation rises, and the sovereign bond yields will harden, the Government is likely to increase the interest rate on it. For all these reasons, continue to take refuge under the PPF when there’re not many options available. Having said this, you shouldn’t solely rely on a particular avenue, including PPF to build your retirement savings corpus.

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