The savings in provident funds or EPF which offered an interest rate of 8.65% for the year ended March 31st is likely to reduce by 25 basis points this fiscal as per two of the labour ministry officials. 1 basis point is one-hundredth of a percentage point.
The likely cut in the interest rate by the EPFO, provident fund body, shall be on the back of declining returns of the organization from its investments in debt markets and fixed deposits.
Investments in the debt market are providing returns between 6.5%-7.75% which is substantially lower in comparison to the return which the organization use to realise in the last two years.
Explaining the impact of interest rate movement in the market on EPF returns, one of the official cited that if interest rate in the market go down by 100 basis points then payout of the provident fund body could be impacted to the extent of 70 basis points.
"So an 8.65% rate is untenable this year and you may see more than a 25 basis point cut in the rate when it is announced."
The EPFO move is also driven by declining returns on benchmark 10-year G-securities which fell to 6.564 on July 3 from 7.419 on July 1.
The provident fund body will be investing 85% of its corpus in the debt market as against 90% last year. 15% of the amount shall be diverted to equities via ETFs.