PPF, Sukanya Rate Cuts Withdrawn. But take the hint & Be Ready

No. This is no April Fool’s thing even though it might seem like one.

In less than 24 hours after announcing big rate cuts, the government took a u-turn, backtracked on its decision and reversed the rate cuts by withdrawing its order.

On 31st March 2021, the government announced substantial rate cuts for small saving schemes like PPF, Sukanya Yojana accounts, etc. The PPF rates were cut drastically from 7.1% to 6.4%; Sukanya Samriddhi Yojana rate was cut from 7.6% to 6.9%; Senior Citizen Savings Scheme (or SCSS) was cut from 7.4% to 6.5%. The rates for NSC, MIS, KVP, etc. were also cut.

Here is the memorandum detailing the rate cuts:

Small Savings Rate Cut 2021 Reversed

But on the very next day, i.e. on 1st April 2021, and maybe fearing a bit of backlash from the savers, the rate cut decision was reversed as per the finance minister’s announcement (link):

Small Savings Rate Cut 2021 Reversed Announcement

So as of now, the rates still stand as they were in the previous quarter Q4 of FY2020-21, i.e. what they were from January to March 2021. Last rate cuts were made for the April-June 2020 quarter (more details here big rate cuts in PPF & Sukanya for 2020).

Although it was said that the rate cut orders were issued due to oversight, we may never know the real reason for this withdrawal. But maybe it is because of the strong reaction on social media and news channels plus coming state elections that in a way, forced the Government to reverse its decision.

Since 2016, the government has been notifying interest rates for small savings schemes on a quarterly basis. It was then said that the small savings schemes rates would be linked to government bond yields. But this has turned out to be a theoretical aspect. In practice, the interest rate changes are made considering several factors not just including mathematical and financial ones but also political ones.

Had the rate cuts would have been actually implemented, then it would have been really bad for the small savers which form a majority of the Indian population. The Public Provident Fund (PPF) rates were cut to 6.4%, which would have been the lowest interest rate on the PPF in the last 50 years. Do check out historical PPF interest rates for a comparative perspective.

But had the government remained with the rate cuts, then it wouldn’t have been surprising and it would have been in line with the overall fall in interest rates across the economy, including those on bank deposits and falling loan rates.

Talking of low-interest rates we need to remember it has two sides.

Lower interest rates help the borrowers no doubt. Individuals can borrow and spend more thereby helping the economy grow in the process (like low home loan rates can help buy real estate now). But on the other hand, savers are hurt by the lower interest rates. The rates are already at multi-year lows and any further cut in small savings schemes interest rates would have hurt them even further. Ideally, we all would love low loan rates and high savings interest rates. Isn’t it? But there is no such thing as an ideal financial world.

But whatever it is, savers can take their collective but temporary sighs of relief for now.

Why temporary?

Because, chances are that small saving rates are on a falling trajectory and sooner or later, the rate cuts will happen. The PPF interest rates too don’t remain the same forever. So you need to be a bit realistic about how PPF rates will change in future. I did touch on this aspect in a post I made for PPF Corpus Calculator where I suggested using a more realistic PPF interest rate assumption, where it gradually tapers down like depicted below:

Falling PPF rates future possible

You might be tempted to invest Rs 1.5 lakh in PPF in April or you might try to invest in PPF before 5th of month. The reason being that PPF interest calculation methodology is slightly technical.

But you need to focus on more important things like role and percentage allocation of PPF in your overall portfolio and not worry too much about perfectly timing your PPF investments. PPF or Sukanya account can just be one aspect of your financial plan. There are many other things to take care of in your financial life. And best way to take back control of your life and finances is by getting yourself a solid plan:

To get yourself a well-thought-through detailed goal-oriented financial plan, that tackles all goals like children’s education, retirement, house purchase, travelling, etc. you can consider professional Stable Financial Planning Service. If you are interested, then head to this page for smart Financial Planning Service. You will increase the probability of achieving your goals on time without stress.

Apart from the articles already linked in this post earlier, I have written few other articles on various aspects of PPF. So if it interests you, then you can read – VPF Vs. PPF; or PPF Maturity Options (After 15 years); or PPF Withdrawal Options (Before 15 years); or PPF Vs. NPS; or ELSS Vs. PPF. And with the chances of PPF rates falling in future, it will take more time for you to save Rs 1 crore using PPF alone. You might also want to check out EPF interest rate history and compare it with PPF rates currently to decide which is better for you.

That’s it.

Even though the government has withdrawn the order and rolled back the interest rate cuts on Public Provident Fund (PPF) and other small savings schemes for the June 2021 quarter substantially, it might be a wise thing to take the hint of what’s in store in future and act accordingly.

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