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Govt to cut special deposit rates soon

The government will soon cut interest rates on the special deposit scheme in which pension money is invested, paving the way for a rate reduction in the country's largest state-run pension fund, a finance ministry official said on Wednesday.

"In due course of time, yes. But nothing has been decided on the extent of the reduction. Even last year the rates were reduced from April 1," the official, who did not wish to be named, told Reuters when asked about a possible cut in SDS rates.

Finance Minister Yashwant Sinha in his 2002-2003 (April-March) Budget last week linked interest rates on state-run voluntary small savings schemes to central bond yields, which translates into a reduction of about 50 basis points.

The special deposit scheme, in which funds collected by the Employees Provident Fund -- India's largest state-run pension fund -- are invested, currently offers a rate of 9.5 per cent. The SDS has funds of over Rs 900 billion.

The EPF board of trustees will meet in New Delhi later this month to decide on interest rates for the fund for the financial year starting April.

Last month the EPF board of trustees decided to maintain the rate at 9.5 per cent but any reduction in the rate for the SDS scheme would force them to reverse their decision.

The EPF board of trustees forwards its recommendations on interest rates to the finance ministry at the beginning of each financial year, which then takes a final decision on the rates.

The EPF is a compulsory savings scheme and a percentage of employees earnings is deducted from the payroll and transferred to the scheme.

The board of trustees, which manages the EPF, has some Rs 1,000 billion invested in assets including nearly 80 per cent in the special deposit scheme.

The Reserve Bank of India on Tuesday lowered the repo rate, a benchmark for short term money market rates.

Interest rates in India have eased over the last year, with the benchmark 10-year central bond yield tumbling 300 basis points, raising expectations of a cut in interest rates on schemes like the EPF.

Analysts say the high interest rates on tax-free, high yielding schemes like the EPF have acted as a stumbling block to the lowering of bank deposit and lending rates.

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