PPF Rate Cuts, the Causes, and the Impact on the Economy

As of 18 March 2016, the interest rates on small savings schemes like Public Provident Fund (PPF), Kisan Vikas Patra (KVP), and National Saving Scheme (NSS) were reduced by the central government. The PPF interest rate went from 8.7% to 8.1%. The NSS interest rate was reduced from 8.5% to 8.1%, and investors will now receive an interest rate of 7.8% (down from 8.7%) on KVPs. On five-year recurring deposits, the interest rate is 7.4% (down from 8.4%).

NSS, PPF, and KVP are considered the safest forms of investment. Hence, they are very popular with people in the middle- and lower-income groups. As a result, elected governments often raise or keep the interest rates of these schemes the same, but very rarely do they lower them. So, why would the current government make an unpopular move and lower these rates when elections were scheduled in three states and a union territory? Read this article to understand how PPF works. 

What is PPF?

When the Public Provident Fund (PPF) was started in 1968, the goal was to help people save small amounts of money by encouraging them to invest and earn returns. This is still a good way to save money because the returns are tax-free. It is often referred to as a savings-cumulative-tax savings investment vehicle. It lets consumers save money on taxes while building a retirement fund—an overall advantage. Anyone who wants to safely save money on taxes and get guaranteed returns should open a PPF account.

What Is a PPF Calculator?

Some of us might be unable to calculate the amounts we can afford to invest in the PPF scheme. In such a situation, you can use a PPF calculator to compute how much you can invest or the money you will receive as returns years later. 

Once you figure out how much you can afford to put into a savings account every month, a calculator looks at how long it will take to reach a specific investment figure. It will also consider the current interest rate to figure out how much money you will eventually make.

How to Use the PPF Calculator?

PPF calculators are easy to use.

• Under the Frequency of Investment field, you will find a list or menu of options. Choose monthly, quarterly, half-annually, or yearly from the dropdown menu. You can also select the frequency of the performance reports you receive. Choose how many times a year you wish to deposit money into your PPF account.
• Under Yearly Deposit Amount, enter the total amount you want to deposit into your PPF account every year. Figure out how much money you can invest in your PPF account every year. A maximum of Rs. 1.5 lakh (capped at this amount) is allowed to be invested every year.
• The current interest rate is shown by default, so you can see how much it costs.
• Decide how long you wish to keep your PPF account active, as this is the minimum period you may choose to make contributions. However, 15 years is the default option. 
• You can use a PPF calculator to figure out the money you will receive from your PPF account when it matures. 

Benefits of PPF

• The investment risk is low as PPF is backed by the government.
• You can open a PPF account at nationalised banks, public banks, post offices, and some private banks.
• After 7 years, you can either withdraw money or avail yourself of a loan against your PPF. In terms of returns, bank FDs do not compare to the benefits PPF offers.
• PPF deposits are in the EEE (exempt-exempt-exempt) group. This means you will not be taxed on the money you invest, the interest you earn, or the money you receive when it matures. PPF investments made in the name of a spouse or a child do not attract taxes either.

PPF Interest Rate

Investors investing in the Public Provident Fund (PPF) earn money as interest. From 1 July 2021 to 30 September 2021, the interest rate was 7.10 percent. A few years ago, the PPF interest rate was set yearly or case-by-case. 

The PPF interest rates of previous years are shown in the table:

Time Period                                                                  Interest Rate (p.a.)

1 July 2021 – 30 September 2021                                                  7.10%

1 April 2021 – 31 July 2021                                                             7.10%

1 January 2021 – 31 March 2021                                                  7.10%

1 October 2020 – 31 December 2020                                           7.10%

1 July 2020 – 30 September 2020                                                  7.10%

1 April 2020 – 30 June 2020                                                           7.10%

1 January 2020 – 31 March 2020                                                    7.90%

1 October 2019 – 31 December 2019                                            7.90%

1 July 2019 – 30 September 2019                                                  7.90%

1 April 2019 – 30 June 2019                                                            8.00%

1 January 2019 – 31 March 2019                                                    8.00%

1 October 2018 – 31 December 2018                                            8.00%

1 July 2018 – 30 September 2018                                                   7.60%

1 April 2018 – 30 June 2018                                                             7.60%

1 January 2018 – 31 March 2018                                                     7.60%

1 October 2017 – 26 December 2017                                            7.80%

1 July 2017 – 30 September 2017                                                     7.80%

1 April 2017 – 30 June 2017                                                              7.90%

1 January 2017 – 31 March 2017                                                      8.00%

1 October 2016 – 31 December 2016                                                 8.00%

1 July 2016 – 30 September 2016                                                        8.10%

1 April 2016 – 30 June 2016                                                                 8.10%

1 April 2015 – 31 March 2016                                                               8.70%

Causes of Rising Interest Rates

Most people who work for the Central Bank will see a rise in interest rates when they think inflation will be higher than they want it to be. When interest rates go up, there is a general rule: They slow down economic growth. When interest rates rise, it costs more to borrow money, which means there is less money for people to buy things with. The pace at which individuals spend money is slowed due to this. It can be easier to keep prices down if interest rates go up. This, in turn, can cause the exchange rate to rise.

The Impact on the Economy

When central banks, such as the Federal Reserve adjust interest rates, the impact on the rest of the world’s economy is magnified.

When the interest rate is lower, borrowing money is less expensive. This encourages individuals and companies to spend and invest. It can increase the value of assets, which in turn may encourage individuals and businesses to spend and invest even more.

Low-interest rates may also result in difficulties such as inflation and liquidity traps, making low-interest rates less effective in reducing debt levels.

Conclusion

The government’s decision to lower interest rates on savings programmes such as the Public Provident Fund (PPF) and the senior citizen savings scheme has angered investors. Analysts believe the move might benefit the economy in the long run.