Interest rate on PPF has fallen by 70 basis points since April 1.

The government on Monday kept the interest rate for the January-March quarter unchanged on popular small savings instruments like Public Provident Fund (PPF), Kisan Vikas Patra, Sukanya Samriddhi Account and Senior Citizens Savings Scheme. This will be a big relief to investors.The popular Public Provident Fund will fetch an interest rate of 8 per cent in the March quarter of the current fiscal year. The interest rate on Kisan Vikas Patra will remain at 7.7 per cent, Five-Year Senior Citizens Savings Scheme at 8.5 per cent and Five-Year National Savings Certificate at 8 per cent.Despite the government keeping rates unchanged on small savings schemes for March quarter, interest rate on PPF has fallen by 70 basis points since April 1.Many analysts had feared a big rate cut in small savings instruments in the wake of an overall decline in interest rate in the financial system. Retirement fund body Employees Provident Fund Organisation or EPFO had earlier decided to lower the interest on provident fund deposits for the current fiscal year to 8.65 per cent, from 8.8 provided in 2015-16, for its over four crore subscribers.Currently, interest rates of small savings schemes are revised every quarter and are linked to yields on government bonds. According to the formula given by the Shyamala Gopinath panel, the interest rates of small savings schemes are reset every quarter and are slightly higher than the government bond yield of previous three months. The yields on government bonds fallen sharply over the past few years amid RBI repo rate cuts, falling inflation and flush in deposits at banks after notes ban.

"Small savings rates are benchmarked to the government bond rates of similar maturity and hence ideally should have fallen in tandem with the bond rates given their quarterly benchmarking. Ideally, if the government does not want this quarterly re-alignment they should shift it to the annual re-set model of earlier to bring in more predictability in interest rate scenarios," said Manoj Nagpal, CEO of Outlook Asia Capital.Despite the fall in interest rates on provident fund deposits and PPF, analysts say that they remain attractive investment avenues for accumulating money for the long term. Provident fund and PPF come under the EEE or exempt, exempt, exempt regime. This means that they offer tax advantage at the time of investment, interest accumulation and withdrawal and redemption stage. (With PTI inputs)