Interest generated in the PPF is not taxed, and contributions up to Rs 1.5 lakh per year are tax deductible under Section 80C of the Income Tax Act, making it one of the most popular modest savings instruments of the government. The present interest rate, which has not changed in over 3.5 years, is lower than the rate mandated under the government’s own formula.

While the government determines the interest rate for small savings accounts, this rate is pegged to the yield on government securities on the market by a margin of zero to one hundred basis points. Therefore, according to the government’s calculation, whether market yields on government securities increase or decrease over the reference period, interest rates on modest savings plans should shift in the same direction.

One basis point is equal to 0.01% of the overall percentage.

The PPF’s formula-based rate of interest should be 7.51 percent, as stated in the Reserve Bank of India’s (RBI) current Monetary Policy Report, published on October 6.

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In its June 2011 report, a committee led by Shyamala Gopinath, then a deputy governor at the Reserve Bank of India, recommended that interest rates on small savings be pegged to the going rate for government securities of similar tenure. In fiscal year 2016–17, the government began providing this information quarterly rather than annually.

It’s possible that the tax advantages of schemes like PPF were overlooked by the Shyamala Gopinath committee. “I think it (return) exceeds 10 percent if you add the tax benefit,” claimed a senior government official.

After leaving rates on small savings schemes unchanged for nine consecutive quarters during the COVID pandemic, when government bond yields fell sharply due to the RBI’s record liquidity injection, the government raised rates for five consecutive quarters beginning in October-December 2022. Over the course of the past five quarters, rates have been raised anywhere from 40 to 150 basis points.

Source: Reserve Bank of India

The Reserve Bank of India stated in its Monetary Policy Report on October 6 that “with these revisions, the actual interest rates on most SSIs (small savings instruments) are now better aligned with the formula-based rates.”

When compared to the prescribed formula, the PPF is the only small savings scheme now offering a lower-than-expected rate of interest. The interest rate on this program was 6.7% in October-December before a rate hike of 20 basis points by the finance minister on September 29.

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The government loses money due to tax breaks, and the interest it pays on PPF funds is part of the cost. This individual also spoke on the condition of anonymity, but he explained that the government has decided to “kind of manage itself within the present rates,” which are among the highest they have seen.

Small savings interest rates appear to have continued to be administered despite being related to market rates. Most notably, the PPF rate was lowered by 70 basis points to 6.4% after the finance ministry announced a massive drop in modest savings interest rates for April-June 2021. Finance Minister Nirmala Sitharaman said the following day that the directive had been made “by oversight” and the decision was reversed.

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This policy, as anticipated, contained no significant unexpected components. The monetary policy stance of “withdrawal of accommodation” persisted, while policy rates remained unchanged. This policy was formulated against the backdrop of a declining inflation rate, namely vegetable prices. Additionally, the Governor stated that a positive aspect is that core inflation has been declining by 140 basis points since its zenith in January 2023.

In addition, the most recent survey of household inflation expectations indicates that expectations for inflation three months from now are down 90 basis points, while expectations for inflation one year from now are down 40 basis points. With demand recovering in the rural sector and remaining robust in the urban sector, the RBI characterizes growth as resilient. The overall development outlook for the year and FY25 remained unchanged at 6.5 percent.

Notwithstanding the aforementioned positive developments that have been emphasized regarding inflation dynamics, the RBI’s stance has not changed; its commentary and forthcoming guidance continue to be pessimistic. This can be attributed to the substantial levels of uncertainty that remain regarding inflation. Aspects of land sown with kharif pulses are deficient, kharif onion production requires close monitoring, and spice demand-supply mismatches are likely to persist. Significantly, the continuation and intensification of El Nino conditions are anticipated to exert an influence on worldwide food supplies and prices. September 2023 saw the FAO All Rice Price Index reach 141.7, a 0.5 percent month-over-month decline from August but a 27.8 percent increase compared to the index level at the same time last year.

I will attempt to situate the RBI’s monetary policy outlook within the global context in the following couple of paragraphs. A significant shift in the global rate environment has occurred. Commencing in 2003, the Fed Funds rate stood at 1 percent, a level not seen since the era of Alan Greenspan. The rates were subsequently grounded at zero percent in the United States during the tenure of Ben Bernanke and in the aftermath of the Great Recession of 2008.

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From that point forward until approximately June 2022, the US Fed Funds rate was, on average, lower than the CPI inflation rate. In contrast, the Fed Funds rate was nearly always higher than the prevailing rate of inflation between 1982 and 2002. To put it more simply, the United States economy had experienced prolonged periods of positive real interest rates prior to 2008. However, since the aftermath of the Global Financial Crisis (GFC), and continuing until very recently, the situation has been marked by negative real interest rates. This holds true regarding the ECB as well.

Currently, we are once again in the region of positive real interest rates. The most recent policy meeting of the US Federal Reserve outlined economic projections that continue to depict the economy’s resiliency. In accordance with the projections, the improved outlook also required the Fed to maintain a hawkish policy stance. Twelve members now anticipate a 25 basis point increase in interest rates by the US Federal Reserve in 2023, while seven others anticipate a hiatus. The dot plot now proposes a 50-bps reduction in interest rates for 2024, as opposed to the 100-bps reduction that was anticipated in the June projections. As a result, the message regarding “higher for longer” is unequivocal, and the Federal Reserve will maintain rates at restrictive levels for a longer duration than in prior cycles.

Significantly, the sanctity of the inflation target rate in monetary policy formulation is acquiring prominence on a global scale. The same holds true for India. As monetary policy communication becomes an increasingly significant instrument in managing and stabilizing inflation expectations, the Reserve Bank of India (RBI) reaffirms its commitment to attaining the 4 percent target consistently. The inflation forecasts published by the Reserve Bank of India (RBI) for the remainder of the year do not appear to indicate that the target of 4 percent cannot be met.

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In Q1FY25, the RBI anticipates headline CPI inflation of 5.2%. In addition, the RBI forecasts a CPI of 4.5 percent for the entire fiscal year of 2025, whereas YES Bank anticipates an average of 4.8 percent. Given the persistent evasion of the 4 percent handle, the Reserve Bank of India (RBI) faces significant challenges in even adopting a “neutral” monetary policy stance, let alone reducing the policy rate.

Thus, “higher for longer” continues to be applicable not only globally but also in the context of India. Additionally, it may prove challenging for the RBI to reduce interest rates prior to the US Federal Reserve, given that the interest differential between India and the US has shrunk to approximately 250 basis points, which is barely sufficient to offset the anticipated annual average depreciation of the INR. This interest disparity might continue to be significant for investors entering the Indian debt market, including those utilizing the JPM Bond Index inclusion route.

Bond market participants had not expected any modifications to the Reserve Bank of India’s liquidity strategy, particularly in light of the gradual reduction of the incremental cash reserve ratio (I-CRR). There were no additional measures specified in this policy. However, the RBI emphasizes once more that excessive liquidity can increase the hazards of inflation and financial instability.

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In doing so, the RBI reinstates the possibility of conducting open market operations (OMO) sales as a means of liquidity management. Although the likelihood of such OMOs being calendarized is low and would be contingent on changing liquidity conditions, the bond market has been alarmed nonetheless. As a result, the benchmark 10-year India G-sec yield has increased by approximately 12 basis points to 7.33 percent, and it may maintain its stability in the foreseeable future.

Disclaimer: The opinions and investment recommendations put forth by investment specialists on Moneypoise.com are purely their own and do not reflect the stance of the website’s administration or its staff. Prior to making any investment decisions, Moneypoise.com recommends that users consult with certified expertise.

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Garg told Moneypoise that some of Das’ decisions as secretary of economic affairs, including the conversion of food subsidy payments to the Food Corporation of India (FCI) into loans from the National Small Savings Fund (NSSF), “pleased everyone” and helped prevent large fiscal deficits. Das’ book, “We Also Make Policy,” was published after Garg expressed his opinion on the matter.

The Centre began providing loans to the FCI from the NSSF in 2016–17, as opposed to full food subsidy payments. These loans accumulated rapidly and assisted in constraining the fiscal deficit of the central government. The approach garnered significant criticism due to its purported detrimental effect on the credibility of the government’s budgetary projections through the artificial maintenance of a low fiscal deficit.

Nevertheless, it appears that the government was able to incur a greater fiscal deficit due to the pandemic; loans to FCI and other practices, including fully-serviced bonds (FSBs), ceased in 2021-22. This was one year after the Centre’s fiscal deficit reached an all-time high of 9.2 percent of GDP, which was surpassed by the Centre’s repayment of the FCI’s loans in 2020-21 through the transfer of an enormous food subsidy amounting to Rs 3.44 lakh crore. The action was commended for its enhanced fiscal transparency.

FSBs are bonds issued by public sector enterprises in which the Union government assumes the repayment of both the principal and interest.

Das held the position of economic affairs secretary between August 2015 and May 2017. In July 2017, Garg assumed leadership of the Department of Economic Affairs.

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India hopes to join the ranks of the world’s wealthy nations by 2047. Naturally, a quicker rate of growth is needed; the current rate of expansion is just about 6-6.5 percent. A growth rate of around 8 percent is required to qualify as a high-income country. And you can’t get there if a sizable portion of your workforce — women — aren’t contributing, Sharma said on October 3 in New Delhi, when the World Bank’s India Development Update report was released.

“So, you need to get the female labour force participation rate to be higher for India to go from 6 percent to 8 percent and become a high-income country.”

According to the government’s Periodic Labour Force Survey reports, the Worker Population Ratio (WPR) for both men and women increased by 1.4 percentage points and 2.3 percentage points, respectively, in January-March 2023 from the year-ago period. However, the increase in the WPR for women was “primarily driven by an increase in the share of women in unpaid work,” as noted by the World Bank in its India Development Update report.

“Moreover, women’s jobs in India are of far poorer quality than men’s, and the proportion of women in regular salaried employment is falling in metropolitan areas.

The research states, “Women in India are almost three times less likely to be employed than men,” and that “even when they are employed, the average quality of their jobs is much lower” than that of men.

Country Director for India at the World Bank, Auguste Kouame, remarked that increasing the female labor force participation rate from its current level of around 25% to the average level of 50% for emerging market economies was a “very important topic” for India.

“The numbers show that India has made substantial financial commitments to the education of its women and girls. India has made tremendous progress… In reality, nowadays there are more women than men enrolled in colleges and institutions. Indian efforts to educate its female population have been successful. Now is the moment to put their knowledge and expertise to work for the country as it strives to become a high-income nation,” Kouame said.

No fiscal slippage

While there is still work to be done in order to reach a GDP growth rate of 8%, the World Bank’s view of the fiscal position is much more optimistic, with World Bank economist Amadou Kouame stating that there was “almost zero risk” of India failing to fulfill its fiscal deficit target this year due to the elections.

We are not factoring in substantial uncertainty surrounding fiscal policy as a result of the elections. He emphasized that there would be no easing of the government’s planned course of fiscal restructuring.

In 2023-24, the Centre aims to bring the fiscal deficit down to 5.9 percent of GDP.

The World Bank predicts a general government budget deficit of 8.7 percent of GDP this year, down from 9 percent in 2017. This includes both the federal government and the individual states. The estimate is “consistent with the government’s estimate,” as Kouame put it.

While the “trend is in the right direction,” the Bank has “no opinion” on whether or not the Centre will meet its medium-term fiscal deficit target of 4.5 percent of GDP by 2025-26, as stated by Kouame.

Given growth dynamics, robust Goods and Services Tax collections, and the government’s capex drive, he added, there might be a “surprise on the upside,” making it less difficult to alter spending to hit the deficit target.

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According to a note published by CareEdge Ratings on Thursday, the National Highways Authority of India is expected to commission between 4,000 and 4,500 kilometers (2,796.2 miles) of brand new roads each year over the course of the next three years. The Indian government has the ability to monetize these assets by utilizing either an Infrastructure Investment Trust or a toll-operate-transfer model.

Because 88 percent of the road projects that were awarded before to March 2020 are now operational and can be monetized, the present plan that the government is implementing, which is based on a model of public-private partnership, has been effective. According to the rating agency, just 12% of projects that were granted in the pre-2020 timeframe are behind schedule because of the shortcomings of their operators.

The aftermath of the pandemic is still having an effect, as one-third of the projects that were granted using a public-private hybrid model after March 2020 are suffering delays due to delayed approvals and the complexity of the projects.

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“Moderate sponsors who have a substantial under-construction portfolio and stricter sanction terms face amplified financing risks,” said Maulesh Desai, director at CareEdge Ratings. “While strong sponsors are expected to benefit from healthy balance sheet indicators, providing them with financial flexibility, moderate sponsors with a substantial under-construction portfolio face increased risks.”

The NHAI initially distributed an InvIT back in November 2021, and as of December 2022, it had collected close to 102 billion rupees. According to reports from the local media, the government of India is planning to issue another tranche of InvITs in order to generate an additional one hundred billion rupees before the end of the financial year.

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The Bank of England’s Monetary Policy Committee voted 5-4 on Thursday to maintain Bank Rate at 5.25%, despite the unexpected deceleration of Britain’s high pace of price inflation the day before.

The 5.5% rate hike was approved by the House of Representatives thanks to the votes of Jon Cunliffe, Megan Greene, Jonathan Haskel, and Catherine Mann.

The Bank of England did not raise interest rates for the first time since December 2021.

Tighter monetary policy is having an effect on the job market and the actual economy, the MPC said.

It highlighted significant evidence of weakening in the property market and lowered its prediction for economic growth in the period of July-September to just 0.1% from the 0.4% predicted in August.

The Bank of England warned that growth would be slower than expected for the rest of the year.

It highlighted that other measures of the labor market did not support the record growth in worker pay that has been a major concern for the BoE, signaling that policymakers expected it to wind down soon.

Despite renewed increasing pressure from oil prices, the BoE predicts “significant further” CPI inflation in the short term, indicating reduced annual energy inflation.

However, it warned that services inflation would continue to rise.

After the Federal Reserve of the United States decided to halt its rate hikes the day before, the Bank of England followed suit and put a stay on its own rate increases. The European Central Bank increased interest rates last week, but this increase may be the last for the time being.

A “further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures,” the statement read, restating previous assurances that policy would be “sufficiently restrictive for sufficiently long” to bring inflation down to the 2% target from August’s 6.7% reading.

Governor Andrew Bailey and other members of the MPC have recently indicated the BoE was close to suspending its run of interest rate hikes, but they have also emphasized that borrowing costs are likely to remain high to ensure inflation pressures are squeezed out of the economy.

Bailey praised the recent decline in inflation and BoE projections that it would continue to diminish in a separate statement on Thursday. However, he stressed that there was no room for complacency. To ensure inflation returns to normal levels, we will continue to take the appropriate measures.

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As part of its efforts to shepherd the economy through the global financial crisis and the coronavirus pandemic, the MPC agreed to accelerate the pace of its strategy to reduce the huge stockpile of government bonds that the central bank collected over the preceding decade and a half.

The BoE announced that the stockpile would be reduced to a total of 658 billion pounds over the next 12 months through a mix of sales and allowing bonds to expire, faster than the 80 billion pounds drop over the previous year, which was largely expected by investors.

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Ausaf Sayeed, external affairs secretary (consular, passport, visa, and overseas Indian affairs), told reporters during the official visit of Saudi Arabia’s Crown Prince and Prime Minister Mohammed bin Salman that talks were at the “discussion stage.”

Discussions between the two sides have begun. Proposals and concept notes have been traded, however at this point it is still merely at the discussion stage. Sayeed remarked, “The Saudi side is aware that we have worked out similar arrangements with other countries in the region.”

Commenting on the meeting between Prime Minister Narendra Modi and Mohammed bin Salman, he said, “The two leaders expressed their satisfaction at the volume of trade both countries have achieved, with India being the second-largest trading partner of Saudi Arabia and Saudi being the fourth-largest trading partner of India.”

In 2022-23, bilateral trade between India and Saudi Arabia totaled $52.76 billion, with exports totaling $10.73 billion and imports totaling $42.04 billion. The result was a trade deficit of $31.31 billion in the previous fiscal year between India and Saudi Arabia.

Last year, Indian authorities actively promoted the use of the rupee abroad, and in July 2022, the RBI announced plans to establish a mechanism to settle global commerce in rupees. Oil from sanctioned Russia at a discount was apparently an early implementation of this strategy when Russia invaded Ukraine in February 2022. However, the mechanism has not gained traction, and there are now rumors that negotiations between India and Russia to settle their bilateral commerce in rupees have been suspended since Russia had amassed billions of rupees in Indian banks that it could not use.

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In the past few months, India has inked a number of bilateral agreements to settle commerce in local currencies. Most recently, in the middle of July, an MoU was signed between India and the United Arab Emirates to establish a Local Currency Settlement System. It has also been discussed with Indonesia that cross-border transactions be settled in local currencies. To settle bilateral trade in local currencies, India may soon form alliances with Brazil, Argentina, South Africa, Senegal, and Tanzania, as reported exclusively by Moneycontrol in August.

After talking about how to settle trade in local currencies, India and Saudi Arabia agreed to speed up talks on an India-Gulf Cooperation Council free trade agreement and increase cooperation in the financial technology sector, according to External Affairs Secretary Sayeed.

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Additionally, the two nations have determined a number of potential areas of cooperation. Some examples are the energy sector, the defense sector, the security sector, the education sector, the transportation sector, the healthcare sector, the tourism sector, the cultural sector, the space sector, and the semiconductor industry.

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In a near future, “(It will be). In this coming month, we will initiate wholesale CBDC borrowing through interbank channels. The choice is yours: this month or next. We have it in testing now. Ajay Kumar Choudhary, an executive director at the RBI, remarked on the margins of the G20 Leaders’ Summit in New Delhi, “Once we are ready, we will be able to start.”

In November 2022, the RBI began testing out a wholesale CBDC, with the settlement of secondary market transactions in government securities as its initial emphasis.

To improve the efficiency of the interbank market, the use of e-W (wholesale CBDC) is advocated. “Settlement in central bank money would reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk,” the central bank said while announcing the commencement of the trial.

However, while the RBI is enthusiastic about the retail CBDC pilot project and expects daily transactions to reach 1 million by the end of 2023 (up from 20,000-25,000 in July), very few transactions have taken place in the secondary market for government securities utilizing the wholesale CBDC.

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Choudhary, however, didn’t appear bothered by the slowness, calling the wholesale CBDC’s application in the government securities market “one single piece” of the whole.

The “call money” market is still another factor. We won’t be able to maximize efficiency until we incorporate all the necessary components. At the moment, in CBDC, we are evaluating each one separately. We’ll proceed with integration once we’ve finished working on the technical, financial, and operational aspects and are comfortable with them. He emphasized that “our goal is not to test the whole thing together.”

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Our goal is to have a presence in every major market. To begin, we are obviously in discussion with the countries that have expressed interest. Our long-term aim, while reasonable, is nonetheless lofty. A participant in the September 5 meetings noted, “We want to be there in every country, be it UPI or other payments and digital products.

The work to expand UPI’s reach abroad continues. Discussions are on with other countries after agreements have been struck with them. We hope to expand UPI’s use over the world. We also hope to connect the UPI to the swift monetary systems of other nations. That’s another method to make the UPI international, the individual said.

The G20 Leaders’ Summit will take place on September 9-10 in New Delhi, and India will use its Presidency to highlight its achievements and competence in the digital payments field. The statements come only days before the summit. India and the United Arab Emirates (UAE) signed a Memorandum of Understanding (MoU) to establish a framework for using their respective local currencies to settle bilateral transactions and link their fast payment systems ahead of the third meeting of the G20 Finance Ministers and Central Bank Governors in Gandhinagar in July.

Following Prime Minister Narendra Modi’s visit to France, where he announced that Indian tourists will be able to make rupee payments using UPI from atop the Eiffel Tower, the MoU to link the UPI with the UAE’s Instant Payment Platform (IPP) was announced. In February of this year, India and Singapore signed an agreement to integrate the UPI with Singapore’s real-time payment system, PayNow.

Many nations are showing keen interest in UPI and RuPay cards. They’re talking to these countries and in various phases of negotiation. The countries most interested are not always those closest to the United States. Countries across Latin America and Africa have expressed an interest in our services. The source further said that “local high commissions and embassies have been in discussions with both NPCI and RBI.”

Leaders’ Summit preparations

The Reserve Bank of India (RBI) will host an exhibition pavilion at the Leaders’ Summit later this week, just as it did at previous G20 meetings held around the country over the past year, to highlight the country’s progress in five key areas: the Central Bank Digital Currency (CBDC), digital payments initiatives like UPI One World and RuPay On-the-Go, the new public tech platform for frictionless credit, and the Bharat Bill Payment System for cross-border bill payments.

In December of 2022, India initiated a pilot program with four cities and four banks to test out the viability of CBDC in the retail sector. Almost 2 million customers and businesses are now part of this network, which has grown to encompass 13 banks and 26 locations. The Reserve Bank of India plans to reach its goal of one million daily retail CBDC transactions by the end of the year.

August saw a modest decline from July’s 20,000-25,000 retail CBDC transactions due to banks’ attempts to make the retail CBDC and UPI infrastructure compatible.

Future pilots will test new use cases and technological design in light of this data. According to our sources, “we are also thinking about adding features like offline usage to provide resilience and availability in the absence of network, and programmability, i.e., tying the use of funds to specific use cases.”

A reliable source claims that the RBI is preparing to launch the wholesale version of the CBDC on the international telephone call market.

The wholesale CBDC pilot project’s goal has always been to test out new innovations in the field. The source spoke on the condition of anonymity to highlight how much simpler it is to conduct trials of new technologies on a large scale during pilot programs.

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India also hopes that the RuPay card would become as ubiquitous in international financial transactions as Visa and Mastercard.

There are just a few of major players in the card payments industry worldwide. We’re working to have RuPay recognized as a viable option. To that end, we’re investigating whether or not RuPay cards can perform all the same types of transactions as other cards can. As with the UPI, “our effort will be to keep adding new facilities and encourage other countries to use RuPay cards,” the source said, adding that RuPay would have to be made attractive “on the basis of merit and features, not regulatory dispensation.”

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It is the sixth month in a row that the monthly mop-up has come in above the Rs 1.5-lakh-crore level, with August’s revenues of Rs 1.59 lakh crore being 3.7% lower than the Rs 1.65 lakh-crore collected in July.

In the current fiscal year, the Centre projects a 12 percent increase in GST receipts, as outlined in its Budget for 2023-24.

Source: Ministry of Finance

Total GST was Rs 83,251 crore, including compensatory cess of Rs 11,695 crore. Central GST was Rs 28,328 crore, State GST was Rs 35,794 crore, and Integrated GST was Rs 83,251 crore.

The August Integrated GST settlement included payments of Rs 37,581 crore to Central GST and Rs 31,408 crore to State GST. Therefore, after settlement, the Central Government received Rs 65,909 crore and the State Government received Rs 67,202 crore in GST revenue for the month.

“During the month, revenue from import of goods was 3 percent higher and the revenues from domestic transactions (including import of services) are 14 percent higher than the revenues from these sources during the same month last year,” the finance ministry stated.

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“These GST collections, coming in the backdrop of the good GDP growth in the first quarter heralds the onset of the festive season where consumption increases occur,” said MS Mani, partner at Deloitte India.

All major producing and consuming states have reported increases of 10%-23%, Mani said, suggesting that the rise in domestic consumption is being felt across the board.

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New estimates for GST show that 2023-24 will see monthly average collections of Rs 1.66 lakh crore.

The amount of GST collected each month has increased over time. After a slow start in its inaugural year (2017–18), when monthly receipts averaged less than Rs 1 lakh crore, they skyrocketed in the years after the epidemic, averaging Rs 1.51 lakh crore in 2022–23.

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