Why the government has offered the lowest interest rate on the Employees Provident Fund in over 40 years

The retirement fund organization Employees Provident Fund Organization (EPFO) on Saturday lowered the interest rate on the employees’ provident fund to 8.1% for 2021-2022, the lowest rate offered by the EPFO ​​since more than four decades, the Press Trust of India news agency reported citing sources. This is the lowest level since 1977-78, when the EPF interest rate was 8%.

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

The forecast EPF interest rate for 2019-20 was the lowest since 2012-13, when it was reduced to 8.5%.

Why low interest rate?

The lowest interest rate offered by the government on the provident fund is due to the low interest regime currently prevailing in the economy. The Reserve Bank of India has kept interest rates at record highs for the past 10 policy meetings to support economic growth that has been ravaged by the Covid-19 pandemic.

Currently, the RBI’s repo rate or lending rate is stable at an all-time high of 4% and the reverse repo, or the rate at which it absorbs excess cash from lenders, unchanged at 3.35%.

With RBI interest rates at record lows, banks are also charging lower interest rates on home loans, car loans, personal loans and other types of loans. The State Bank of India, the largest lender in the country, charges 6.7% interest and even private lenders offer home loans from the same interest rate.

Auto loans are offered by the State Bank of India in the range of 7.2 to 7.7 percent, according to data on its website.

Hence interest rates on deposits are also at lower levels, State Bank of India is offering fixed deposit term interest rate from 211 days to less than one year at 4.4% and on longer-term fixed deposits with tenors of 2 years and 3 years. are offered at 5.1 percent.

However, with rising inflation due to soaring crude prices internationally following Russia’s invasion of Ukraine and soaring prices for various industrial metals due to supply chain disruptions of supply following sanctions on Russia, it remains to be seen when the low interest rate regime cycle will turn with various central banks also hinting at higher interest rates.

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

But Powell opened the door for a bigger hike in case inflation, which has hit a four-decade high, doesn’t come down materially this year, as the Fed expects.

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