PPF interest rate should have been 6.63% instead of 7.1%, says RBI

Updated Oct 19, 2021

Key Highlights

• Interest rates on small savings schemes are to be revised every quarter in line with an agreed formula.
• The formula offers a spread over the average yield on government securities for a comparable maturity.
• As per the central bank's calculation, the interest rate differential is maximum in the case of 1-year term deposit.

New Delhi: The government is paying between 47 and 178 basis points (100 basis points equal a percentage point) higher interest on the money parked in different small savings schemes by maintaining status quo on these rates for the last six quarters, the Reserve Bank of India said in its bulletin, which was released on Monday.

As per the central bank's calculation interest rate on the popular Public Provident Fund (PPF) scheme should have been 6.63% for the current October-December quarter instead of 7.1% that is being offered now.

Interest rates on small savings schemes are to be revised every quarter in line with an agreed formula that offers a spread over the average yield on government securities for a comparable maturity. For instance, in the case of PPF, which comes with a 15-year lock-in, a 25-basis point spread is allowed. After factoring in the average yield of 6.38% on G-secs with comparable maturity, the government should be offering 6.63% during the current quarter, but is instead paying 7.1%, RBI said.

Similarly, RBI, in its bulletin, also mentioned the actual interest rate that should have been offered on other small savings schemes and the present interest rate that is being offered. As per the central bank's calculation, the interest rate differential is maximum in the case of 1-year term deposit, which is 178 basis points.