Thursday, Jun 30, 2022
Outlook Business

Why Government Is Offering Lowest Interest Rate On Employee's Provident Fund In Over 40 Years 

The lowest interest rate offered by the government on provident fund is because of low interest regime currently prevailing in the economy

The government is offering 8.1% on provident fund File photo

The retirement fund body Employees Provident Fund Organisation (EPFO) on Saturday lowered interest rate on Employees' Provident Fund to 8.1 per cent for 2021-22, lowest rate offered by EPFO in over four decades, news agency Press Trust of India reported citing sources. This is the lowest since 1977-78, when the EPF interest rate stood at 8 per cent. 

In March 2020, EPFO had lowered the interest rate on provident fund deposits to a seven-year low of 8.5 per cent for 2019-20, from 8.65 per cent provided for 2018-19. 

The EPF interest rate provided for 2019-20 was the lowest since 2012-13, when it was brought down to 8.5 per cent. 

Why Low Interest? 

The lowest interest rate offered by the government on provident fund is because of low interest regime currently prevailing in the economy. The Reserve Bank of India has kept interest rates at record lows since last 10 policy meetings to support economic growth which was ravaged by the Covid-19 pandemic. 

Currently, the RBI's repo rate or lending rate is steady at record low of 4 per cent and the reverse repo, or the rate at which it absorbs excess cash from lenders, unchanged at 3.35 per cent. 

With the RBI's interest rates at record lows the banks are also charging less interest rate on home loans, car loans, personal loans and other types of loans. State Bank of India, the country's largest lender, charges 6.7 per cent interest and even private lenders are offering home loans starting at the same interest rate. 

Car loans are being offered by the State Bank of India in range of 7.2-7.7 per cent, data from its website showed. 

Consequently, the interest rate on deposits are also at lower levels, State Bank of India offers interest rate on fixed deposit tenor of 211 days to less than 1 year at 4.4 per cent and on longer term fixed deposits with tenors of 2 years and 3 years are being offered at 5.1 per cent. 

However, with rising inflation on the back of surge in crude prices internationally after Russia invaded Ukraine and the spike in price of various industrial metals due to supply chain disruptions over sanctions on Russia it remains to be seen when the low interest regime cycle will turn with various central banks also hinting at hiking interest rates. 

Earlier this month, US Federal Reserve Chairman Jerome Powell said that he supported a traditional quarter-point increase in the Federal Reserve’s benchmark short-term interest rate when the Fed meets later this month, rather than a larger increase that some of its policymakers have proposed, news agency Associated Press reported. 

But Powell did open the door to a bigger hike in the event that inflation, which has reached a four-decade high, doesn’t noticeably decline this year, as the Fed expects it to.