Big Cuts in Small Saving Schemes (PPF, Sukanya Yojana): Apr-Jun 2020

PPF Interest Rate has been reduced to 7.1% (from 7.9%) and Sukanya Samriddhi Account Interest Rate has been reduced to 7.6% (from 8.4%) for April-June 2020.

The government finally decided to bite the bullet and announced big cuts in the interest rates of the small savings schemes.

Was this expected? In a way, yes. There were growing indicators that this will happen soon. And if you check inflation rates in the last few quarters, then it was clear that the small savings schemes like PPF, SSY, SCSS etc. were getting some degree of preferential treatment. And that too for the obvious reason of these instruments catering to the savings needs of a large majority of Indians.

But these prolonged socially-aware deviations were bound to correct. And they have now.

As a result, the interest rates for PPF, Sukanya Samriddhi Yojana (SSY), Senior Citizens Savings Scheme (SCSS) and other Small Savings Schemes have been cut very sharply.

So what are the latest PPF Interest Rate, Sukanya Samriddhi Yojana Interest Rate and Interest Rate for all other Small Savings Schemes?

  • Public Provident Fund (PPF): 7.10% (for Apr-Jun 2020). The earlier rates were 7.90% and hence, there has been a change of -0.80%.
  • Sukanya Samriddhi Yojana (SSY): 7.60% (for Apr-Jun 2020). The earlier rates were 8.40% and hence, there has been a change of -0.80%.
  • Senior Citizens Savings Scheme (SCSS): 7.40% (for Apr-Jun 2020). The earlier rates were 8.60% and hence, there has been a change of -1.20%.
  • Other small savings instruments also saw comparable falls in their interest rates.

If you are interested in the past interest rates, then do check super detailed PPF Interest Rate History or you can also check the Sukanya Samriddhi Yojana Interest Rate History.

Please remember that these days, the interest rates of small savings schemes are notified quarterly. It’s not necessary that they will change it every quarter. But they have the option of doing it.

But if you are confused why suddenly the government decided to go for such big rate cuts, then let me explain it in easy terms.

Now as I said, the rates are reviewed quarterly. More technically, the rates are reviewed “…to align the small saving interest rates with the market rates of the relevant Government securities.

Let me skip the boring details. Simply note that for PPF and SSY, the benchmark or the relevant government security mentioned above is generally, the 10-year government bond. And how will this impact PPF rates and SSY rates?

After a lot of deliberation and a few years ago, it was decided that going forward, the PPF rates will be X+0.25% and the Sukanya Yojana rates will be X+0.75%, with X being the benchmark 10-year government bond. As of now, the recent past has shown the benchmark to be closer to 6.5%.

So using the formula, PPF should have been 6.5% + 0.25% = 6.75% and SSY should have been 6.5% + 0.75% = 7.25%. But the actual announced rates are still higher – PPF being 7.1% and SSY being 7.6%.

So why is the government now being so benevolent?

It is not about just now. The government has generally never followed the formula-based rate-setting exactly. In past and also this time, It has gone ahead and announced a slightly higher rate than what was formula-suggested. But the difference between the formula-based rate and the announced ones is gradually decreasing. Earlier the interest rates were very high as compared to the formula rates. Now the difference isn’t that much and is expected to remain so in the near future, assuming the government doesn’t go into some politically-driven agendas.

Another factor is that the lobby of bankers were pushing the government to reduce rates for PPF, etc. And I have written about this few years back too. The popular fixed deposits were facing stiff competition by PPF etc. due to their higher interest rates. So they were pushing for reducing in PPF, SSY rates so that FDs could make a comeback as a viable saving option for the long term as well (atleast in the eyes of bankers if not us).

But this is as the things are. And not much to say here.

But a couple of points before I leave and this is to clarify the doubts that many have:

  • The change in PPF and SSY rates impacts the interest earned by your existing savings as well as the contributions you make in future. So your total PPF balance will earn lower rates and not just the fresh savings you make going forward in PPF.
  • The existing SCSS will continue to earn the same rate of interest as was promised the time of account opening. Only the new investments in SCSS will be getting the lower rates which have been announced.

As risk-free rates continue to fall, it is more important than ever for you to find the right asset allocation for your goal based investment portfolio. And a proper Goal-based Financial Planning can help you in this regard.

In past, I have already written a few posts related to PPF and Sukanya Yojana. If you are interested, then you can refer to the below links:

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