It has been reported that the government is considering a significant increase in the rate of interest associated with deposits in the Employees’ Provident Fund Organisation, or EPFO. It is said that the EPFO has recommended that the interest rate on provident funds, which is 8.75 per cent at present, be raised to 8.95 per cent for 2015-16. The current interest rate on fixed deposits in the State Bank of India is 8.5 per cent. The differential is much greater when tax savings associated with provident fund deposits are considered.
The EPFO interest rate is just one of the many complex and strikingly persistent administered rates for various state small savings schemes. Banks have to compete for depositors with these tax-saving schemes. The high rates that such schemes offer their depositors are often cited by banks as one reason why they cannot easily drop borrowing rates – and thus lending rates – in spite of repeated cuts in the repo rate by the Reserve Bank of India. It is important, therefore, from the point of view of strengthening the monetary transmission mechanism, that such rates be more explicitly linked to the market. Recent committee reports, including from committees chaired by Shyamala Gopinath and Y V Reddy, have strongly recommended as much. But the government has been reluctant, for political reasons, to cede control. In fact, the last major alteration to administered rates in the small-savings system was in 2002. A recent research report from the State Bank of India suggested that the small savings rate should be uniform and linked to the average of deposit rates with the top five banks. The RBI has also indicated that the government must take action to correct problems in monetary policy transmission – indeed, in September 2015, when the RBI cut repo rates by 50 basis points to 6.75 per cent, the finance ministry had explicitly said that the Centre would review and rationalise small savings schemes. Even subsequently, the finance ministry has indicated that a plan to liberalise the interest rate regime for small savings schemes is under consideration.
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