Will the government cut your PPF rates and the rates for other small savings schemes like Sukanya Yojana, SCSS, NSC interest rates in the coming quarter?
It is possible.
In fact, in the last quarterly update, it did cut the rates drastically but then reversed its decision within hours. Who knows what was the motive behind the decision and then its speedy reversal. On 31st March 2021, the government announced substantial rate cuts for small saving schemes like PPF, Sukanya Yojana accounts, etc. The PPF interest 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.
But this time around, the decision isn’t going to be easy.
High inflation (expected to be close to 6-6.5% in this financial year) makes it a very tough call for the government to reduce rates on the small savings schemes. A rise in inflation and falling interest rates (FD rates are at multi-year lows) means that real returns are actually negative as of now for most debt instruments.
On the other hand, if we strictly go by the formula that is to be used (but rarely used) to set the small savings rates, then the government will ‘have to cut’ rates to some extent.
But even if it doesn’t cut the rates now, it will only be a temporary relief.
The 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 the 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 over the next few years.
You might still admire the simplicity and robustness of PPF and look to save Rs 1 crore using PPF alone, but sooner or later, you will need to need to focus on more important things like proper asset allocation between equity and debt so that atleast your equity portfolio is able to beat inflation.
Let’s see what happens. I cannot predict anything.
But as I said earlier, take the hint and make long-term investment plans accordingly.