EPF INTEREST HIKED
The government has hiked the interest rate
paid to Employees Provident Fund (EPF) subscribers from an
interim 8.5% to 9.5% for ‘04-05.
The 100 basis point increase comes as a bonanza
for the 2.7 crore EPF depositors, though it would signal a
hardening of interest rates in the economy and adversely impact
the bond market.
Finance minister P Chidambaram said that
Prime Minister Manmohan Singh had considered the matter carefully
before taking a decision. The late evening announcement is,
however, being viewed as a trade-off with the Left for letting
the government hike the FDI limit in telecom from 49% to 74%.
The hike in EPF rate will mean a shortfall
of Rs 269 crore to the EPFO. The finance ministry’s
contention has been that the EPFO would just about manage
to break even if it were to declare an interest rate of 8.25%,
considering that there has been a fall in the yields on its
investments.
Labour ministry sources, however, maintained
that the Rs 269 crore loss would be made good through a Rs
300 crore arrears recovery by the EPFO from several establishments.
A treasury manager of a leading public sector
bank said the EPF rate rise would adversely affect the bond
market tomorrow, though markets did have some apprehensions
about a possible hike. “It is a clear signal that interest
rates must realign upwards”, he said.
Along with the 100 basis point hike in the
interest rate for ‘04-05, the government has also ratified
interest rates on EPF deposits for ‘02-03 and ‘03-04.
For both these years, the interest rate was 9.5% — though
for ‘03-04, this included a golden jubilee bonus of
0.5%.
Officials said EPFO had net yields of about
Rs 708 crore till ‘02-03. Though the fund had suffered
a loss of Rs 271 crore in ‘03-04, it is still left with
a surplus of Rs 437 crore to offset the higher rates ratified
by the finance ministry.
Only last week the finance ministry allowed
non government provident fund managers to invest up to 5%
of their incremental deposits in equity. The EPFO has also
made out a case for allowing investment in equities to generate
higher returns.
For ‘04-05, the labour ministry had
announced an interim 8.5% interest rate on EPF deposits. The
government was, however, under pressure from the Left to hike
the interest rate and the demand was made even during the
pre-budget interaction with finance minister P Chidambaram
