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October 10, 2001
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Reddy panel for floating rate on PPF

BS Banking Bureau

The Y V Reddy expert committee on small savings has suggested that that all investment in public provident fund would be on a floating rate basis to be revised annually.

According to the committee it would be difficult to take a view on interest rate on long-term savings like PPF.

Interest rates on PPF may be benchmarked to the average secondary market yield on government securities having a residual maturity of around ten years.

The committee has also said that interest rates on other administered schemes like GPF and EPF may follow the principle applicable to PPF.

It has also suggested that interest rate on one year postal deposit may be benchmarked to the average yield of 364 Days Treasury Bills traded in the secondary market during the previous year.

Also the interest rate on five-year postal deposit/post office monthly income scheme/post office recurring deposit may be benchmarked to the average secondary market yield on government securities having a residual maturity of around five years.

Also it has suggested that interest rates on two and three year postal deposits may be calibrated between one and five-year postal deposit rates. It has added that interest rates on all non-bearer certificates should be marginally higher (lower) than the 5-year postal deposit rate, depending upon the maturity of the instruments.

The committee has said that the transferability feature on bearer instrument like Kisan Vikas Patra be removed. It has also added that the interest rate on bearer instruments like Kisan Vikas Patra should also be on par with non-bearer certificates.

Also the interest rate on relief bonds, the same principles should apply. However, it should be terminated at an early date to avoid distortions.

It has also said that the spread over the benchmark yields for fixing the interest rates on the small saving schemes may have to be suitably calibrated subject to a maximum of 50 basis points depending upon the maturity and liquidity of the instrument, keeping in view the savers' interest, particularly for long term instruments.

The objective should be to reduce the spread over the benchmark rate over a period.

Investors should also have the option to choose between the fixed rates or floating rates at the time of entry, excepting investors in provident funds (PPF, GPF and EPF) who would have the option of floating rates only.

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