Can interest rate on PPF fall below 6.5% after repo rate cut of 1% this year?

Economic Times

2 days ago

ET Online The government is set to review the interest rates for small savings schemes like the Public Provident Fund (PPF), National Savings Certificate (NSC), Senior Citizens Savings Scheme (SCSS), and more, on June 30, 2025. So far, the interest rates on the Post Office Savings Scheme have stayed the same since the beginning of the year. But that may change now as the Reserve Bank of India (RBI) has significantly reduced the repo rate by a total of 1% this year. Bond yields have also adjusted to the falling interest rate, and banks have followed the suit by lowering the interest rates on fixed deposits.
PPF is currently offering an interest rate of 7.1% which is very close to the lowest interest rate seen in the last 5 decades. Last time, PPF interest rate was seen below 7% was before August 1974. PPF being one of the most popular small saving schemes for long term investment, where investors have been used to expecting an attractive interest rate, any significant drop in interest rate could take the returns to a historically low level and may leave many disappointed. Let us check out how likely it is.
Also Read: Are PPF, NSC and other small savings scheme interest rate headed for historic lows? How the Government decides PPF interest The interest rate on PPF is based on a formula recommended by the Shyamala Gopinath Committee. Following the committee's suggestions, the PPF interest rate is pegged 25 basis points above the average of a 10-year G-Sec yield for the previous quarter.According to data available on investing.com, the average yield for the 10-year G-Sec was 6.319% between March 25, 2025, and June 25, 2025. When you add those 25 basis points, the PPF interest rate comes out to 6.569%. It is crucial to note that the formula recommended by the committee is not binding on the government. Can the government bring the PPF interest rate below 6.5%? ET Wealth online spoke to experts about whether the government can lower the PPF interest rate below 6.5% if the bond yield continues to fall. Here is what they have to say:
Namrata Mittal, Chief Economist, SBI Mutual Fund, says: Shyamala Gopinath Committee (2010) on Small Savings was tasked to review the interest rate structures and administration of small savings in India, including the PPF. The committee had recommended that interest rates for small savings schemes like PPF, should be linked to market yields of government securities (G-secs) of similar maturity. Specifically for PPF, the rate should be linked to the average yield of 10-year government bonds, with a spread of 25 bps above it, thus allowing the PPF rate to be more adaptable to changing economic conditions. However, the resets haven't truly been in line with the committee's recommendations. They have remained constant at 7.1% since April 2020. The committee has suggested that the government should reset these interest rates annually, aligned with the previous year's G-sec average yields. The average 10-year G-sec in FY25 was approximately 6.8-6.9%. Therefore, the 25 bps of mark-up could maintain the PPF rate at 7.1%. Plus, the small savings collection is moderating. The government collected Rs 4.5 trillion under small savings and PPF (combined) in FY24. It's likely to decrease to Rs 4.3 trillion in FY25 (RE stands at 4.1 trillion) and is projected to further decline to Rs 3.4 trillion in FY26 (according to Budgets). The slowdown in small savings is the combined effect of high base (from investment limits upgrade in Union budget 2024) and better returns in alternate avenues of financial savings (like capital market). In this context, a negative shift in interest rate seems less probable.
Suresh Darak, Founder, Bondbazaar, says: "While we have seen short-term interest rates drop with the latest round of Repo rate and CRR rate cuts, the 10-year G-Sec has continued to trade in a narrow range around 6.5% for the last five years. Since PPF is a long-term investment with a 15-year lock-in, its returns are unlikely to be pegged below 6.5%. Moreover, the returns on PPF investment at 7.1% is already lower compared to other government saving schemes such as Senior Citizens Savings Scheme (8.2%), Sukanya Samriddhi Yojana (8.2%) and Kisan Vikas Patra (7.5%). PPF provides stable long-term financing to the government, unlike G-Sec, which is more susceptible to market forces and geopolitical risks. Lowering the interest rate on PPF from this level may lead to an outflow of funds to other investment avenues. Thus, it is unlikely that there will be a significant cut in PPF rate, and it should not go below 6.5%."
Vineet Agrawal, Cofounder, Jiraaf, a Bond Investment platform, says: The PPF interest rate has held steady at 7.1% for an extended period, despite notable shifts in the interest rate environment. As per the Shyamala Gopinath committee's recommendations, small savings rates-including PPF-should be market-linked and set within a band of 25 to 100 basis points above the yields of government securities with similar maturities. Currently, the 10-year G-sec yield has dropped below 6.5% and is stabilising around 6.3% in response to the 100 basis points repo rate cut seen this year. The growing divergence suggests that the current PPF rate exceeds the recommended spread. With falling G-sec yields, the Finance Ministry will likely move to realign the PPF rate in the coming quarter. While a reduction below 6.5% is technically feasible, any such move would need to weigh alignment with market rates against the political and social sensitivities of lowering returns on a key household savings instrument.
Adhil Shetty, CEO, BankBazaar.com, says: It is important to remember that the formula recommended by the Shyamala Gopinath Committee is indicative and not binding, and the government has frequently deviated from it. The government can reduce the PPF interest rate below 6.5% if G-sec yields fall. However, PPF and other small savings are heavily influenced by political, behavioural, and economic factors. PPF is a household savings favourite, and reducing it to below 6.5% can have a serious impact on middle-class and retirement savers. A sharp cut could push savers to exit formal channels or chase riskier products, thereby undermining financial inclusion goals. The government will be wary of any drastic cuts in small savings rates. However, given the high liquidity and falling repo rates, slow correction over time cannot be ruled out. Has the PPF, since its inception, had an interest rate below 6.5%? According to data available from the National Savings Institute, the interest rate on PPF has dipped below 6.5% on four occasions. Initially, when the PPF was launched, it was offering an interest rate of 4.8% from 1968-69 to 1969-70. Following that, from 1970-71 to 1972-73, the PPF scheme offered 5% interest. In 1973-74, the rate increased to 5.3% and then from April 1, 1974, to July 31, 1974, it rose to 5.8%.
PPF interest rate since inception
YEAR RATE OF INTEREST (%) 1968-69 TO 1969-70 4.8 1970-71 TO 1972-73 5 1973-74 5.3 01.04.1974 TO 31.07.1974 5.8 01.08.1974 TO 31.03.1975 7 1975-76 TO 1976-77 7 1977-78 TO 1979-80 7.5 1980-81 8 1981-82 TO 1982-83 8.5 1983-84 9 1984-85 9.5 1985-86 10 1986-87 TO 1998-99 12 01.04.1999 TO 14.01.2000 12 15.01.2000 TO 28.02.2001 11 01.03.2001 TO 28.02.2002 9.5 01.03.2002 TO 28.02.2003 9 01.03.2003 TO 30.11.2011 8 01.12.2011 TO 31.03.2012 8.6 01.04.2012 TO 31.03.2013 8.8 01.04.2013 TO 31.03.2016 8.7 01.04.2016 TO 30.09.2016 8.1 01.10.2016 TO 31.03.2017 8 01.04.2017 TO 30.06.2017 7.9 01.07.2017 TO 31.12.2017 7.8 01.01.2018 TO 30.09.2018 7.6 01.10.2018 TO 31.06.2019 8 01.07.2019 TO 31.03.2020 7.9 01.04.2020 TO 30.06.2025 7.1 Source: National Savings Institute