Politics may prevent a steep cut in the PPF rate

Interest rates on small savings schemes are due for recalibration next week, but observers believe the government might avoid making steep cuts. Small savings rates are linked to the prevailing yields in the bond market.

In the July-September quarter, the average bond yield is roughly 20 basis points lower than the previous quarter. But the small savings rates may get cut by barely 10 basis points. “After the fuel price hike, a big reduction in the rates for small saving schemes can increase resentment among common investors,“ says Monika Chopra, who teaches at

International Management Institute

.. A 10 basis point cut will reduce the

PPF rate

to 7.7%, the lowest in 37 years.

PPF

rates have progressively come down in the past two years, mirroring the decline in bond yields.

Advisors say the PPF is better than bank FDs because of its tax-free status. Besides, consumer inflation is still low at 3.6%, so the real return from the PPF is more than 4%.

Salaried investors covered by the Employee Provident Fund can increase their PF contribution through the Voluntary Provident Fund (VPF) which offers 8.65%. In most companies, employees can give the VPF mandate twice in a year-once at the beginning of the new financial year in April and again in the first week of October. So, this is the right time to opt for VPF if you want higher returns than the PPF.