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Government slashed the interest rates of PPF from 8.7% to 8.1%

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The government announced that Interest rate on Public Provident Fund (PPF) scheme will be cut to 8.1 per cent for the period April 1 to June 30, from 8.7 per cent.

Flash points

  • The rates of Public Provident Fund was slashed by 60 basis points, and Kisan Vikas Patra, by 90 basis points
  • It is done to create conducive environment for the Reserve Bank of India to ease monetary policy rates further, and help banks transmit rate cuts to customers

Schemes suffering reduction

The new interest rates for 12 small savings schemes, including term deposits of one to five years’ maturity, five-year recurring deposit, five-year Senior Citizen Savings Scheme, Government slashed the interest rates of PPF from 8.7% to 8.1%five-year Monthly Income Scheme, Sukanya Samriddhi Account Scheme, and National Savings Certificate

New Rates

  • Five-Year National Savings Certificates will earn an interest rate of 1 per cent as against 8.5 per cent
  • Five-year Monthly Income Account will fetch 7.8 per cent as opposed to 8.4 per cent
  • Two-year time deposit will now earn 2 per cent instead of 8.4 per cent, three-year time deposit will earn 7.4 per cent instead of 8.4 per cent, five-year time deposit will earn 7.9 per cent instead of 8.5 per cent
  • Five-year recurring deposit will earn 4 per cent instead of 8.4 per cent

Effects of Rate cut

  • The government’s decision, especially the substantial cut in rates for PPF and KVP, will nudge banks to move for lower interest rate regime
  • It will force RBI to reduce the key policy rate (repo rate) by equivalent magnitude
  • The decision reduces rigidities in interest rate regime in India

Points to know

  • Chief economic Advisor- Arvind Subramanian
  • Economic affairs secretary- Shaktikanta Das
  • CRISIL Chief economist- D K Joshi