There were many years in late 90's leading up to early noughties when the rate of interest for 15-year Public Provident Fund commonly available in post offices and some PSUbanks was stuck at 12 per cent and it looked as if nothing could make it budge. After a change in 2004, it hasn't really gone anywhere (the rate). That was till last year when the government announced that the rate will change every year and will be linked to government securities. The government has announced a higher rate for of 8.9 per cent (I need to double check this) for 2012-13. Ironically, this comes at a time when the rate for Employees' Provident Fund has been reduced to 8.25 per cent. While this had to happen for the latter given that EPF sees a tug-of-war among the three ministires that overseee it, the PPF development interests me. Why? If the direct tax reform blue print, the Direct Taxes Code comes into force, then PPF's attractiveness thanks to tax-free contribution, interest and maturity proceeds will see a change as maturity proceeds will become taxable. Link with market rates will make the rate realistic and not artificially high or low. This means that in the future it will be like a very low risk investment since it is backed by the government. If other lower risk options come up well such as FMPs and similar form of debt funds that pay more, are more tax efficient and can give Indians some idea of their eventual returns besides being accessible, people in the higher tax slabs may not try and hit the investment limit of Rs 1 lakh. Indians typically are risk-averse and will either let their money vegetate their or go for a fixed deposit. The development I mentioned will mean that Indians would actually moving towards having a debt investments' portfolio. That will be quite an evolution.
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