Why PPF rates have NOT been increased?

The government notified the increase in almost all small savings scheme for April-June 2023 quarter (Q1 of FY2023-24) – read detail here. I have used the term ‘almost all’ as there has been no increase in PPF or Public Provident Fund interest rates. The rates for other instruments have seen a hike of 0.10-0.70% in the latest update.

The PPF interest rates remain at 7.1%. And these have remained at this level since last 3 years.

More specifically, PPF rates were last changed in Apr-Jun 2020 when they were lowered from 7.9% to 7.1%. Here is the full history of PPF interest rates if you are curious to see PPF rate trends.

Almost all PPF account holders are expressing their anger. And its natural. All they see is that the interest rates for all other small saving schemes are increased but PPF stays same.

So why is this happening?

Why has PPF rate NOT been increased?

We can only try to arrive at the reasons and make few guesses. The real reason might only be known to the people in power. But here are few possibilities –

• PPF is one of the only few small savings schemes which are still tax-free. The interest earned and the interest on interest earned is still has no taxation under EEE. And this tax exemption status may be one of the main reasons why the interest rate has not been increased on the PPF. If you account for the tax benefit, the effective rate of PPF is a lot higher than the 7.1% it gives.
• In recent past, the government has said that it wants to increase its reliance on the NSSF (or National Small Savings Fund, of which all small savings schemes are part of) to finance some of its fiscal deficit burden. So this is the reason to increase the interest rates of many small savings instruments. This will help get steady deposits in the coming quarters from these schemes. PPF rate hike, I guess, has been skipped due to its higher effective rates (as explained in previous point).
• The government uses the recommendations of Shyamala Gopinath committee for setting small savings scheme rates. But in recent times, the government hasn’t strictly made rate changes as per the Shyamala Gopinath panel formula. More so for those schemes which are tax-free like PPF and Sukanya Samriddhi Yojana. Had the formula been used strictly, the PPF rates, which are usually linked and benchmarked to the 10-year government bond yields, the PPF rates would have seen rates increase to close to 7.70%. But that was not to be. Sukanya rates have been increased due to social angle and also because the overall Sukanya Samriddhi corpus from all depositors is many times smaller than PPF corpus and its interest burden will be lower on the government. To be fair and to give credit where it is due, it is not that the government is slow (or avoids) in increasing PPF rates if the Gopinath formula suggests so. In past, it has been slow to cut down the rates. The PPF rates remained at 7.1% for a long time even though the yields of comparable govt. bonds were much lower.
• Another possible reason is that among the various small savings scheme, PPF may have the biggest overall corpus. So maybe the cost impact (due to interest burden, that too tax-free) on the government is a lot more for PPF because of its higher AUM compared to other instruments. So this might be another reason for not raising the interest rates.
• The government wouldn’t also want to drain away a lot of funds which would have otherwise flowed into banks. The government would, at all times, want to ensure that the ability of banks to raise deposits to meet an increase in credit demand should be strong. And if long-term lock-in product like PPF becomes too attractive, then it would mean short-term bank fixed deposits become less attractive. And that is not what the government would want at this time.
• Some people feel that if the RBI Repo rates are rising, so should the PPF interest rates. That is not correct, even though people will argue that repo rate increases FD rates and loan rates, so why not PPF rates. We need to understand that PPF interest rates are linked to long-term yields of comparable govt. bond instruments. And the repo rate is something different and not exactly linked.
• Last one? Its far easier to raise the PPF interest rates for the government than reducing it. Whenever there is a talk to reduce it (as it happened in 2021, when the government had to take back its decision to cut PPF rates from 7.1% to 6.4%), there is a lot of negative uproar among the depositors. So if government thinks that there might be a need to reduce it in near future, then it will try to avoid taking that route if it means increasing it now.

Disclaimer – This is just a general discussion about the possible reasons that government would have had for (surprisingly) not increasing the interest rates for PPF. It is quite possible that the next RBI meeting may further go for a rate hike and then PPF interest rates may be increased during the next quarter (Jul-Sep 2023). No guarantees though.