With the finance ministry going ahead with the slashing of the interest rates on general provident fund rates and special deposit scheme from April 1, it will be the middle-class employee-savers who will be crying all the way to the bank. Not only their fixed deposit rates have seen a constant decline in returns now even their old-age savings are under the threat of low returns. But as of now, they are the safest tools for investments and continue to remain so.The special deposit scheme, in which funds collected by the Employees Provident Fund, India’s largest state-run pension fund, are invested, has a corpus of more than Rs 90,000 crore. “The cut in provident fund rate was expected in a falling interest rate scenario,” says a Mumbai-based banker.“A cut in interest rates will give the industry and government access to cheap funds. But it will help middle-class only if their home loans and car and consumer durable loans rates also fall by a similar percentage points,” he said. There’s no disagreement. But it will be reflected in the income of savers. The interest rates were cut from 9 per cent after the government reduced rates on some small savings schemes by 100 basis points in the Budget last month.In fact with the cut in EPF rates, bankers say that interest rates are bound to fall further. “I expect the interest rates to decline by 50 bps in the medium term and a rise in disposable incomes will keep topline and pricing power growing,” says Crisil senior economist A. Barua.Bankers say investments by EPF corpus would have turned negative if labour ministry insists on keeping the interest rate at the same levels. In fact, the EPF rates — which had become a battle of ego of sorts between the labour ministry and finance ministry — till date has a surplus. But in a falling interest rate scenario it would not be possible for the trustees of the scheme to sustain rates. Hence, the cut.In this scenario what are the options before a saver? None, say analysts. “An EPF saver can not withdraw his money unless it is for buying a home or for a marriage in the family. Thus, an investor should take a long-term view and just forget about returns from his EPF corpus,” says N. Iyer, a Mumbai-based personal finance consultant. “After factoring in the tax breaks the returns on EPF are still better than other investment avenues. Plus as a bonus it is one of the safest instruments of investments. Hence, an investor should take a long-term view,” he said.Though the low interest rates will hurt a saver on the returns front, a lower rate will help him to reduce his various loan burden — be it a home loan or a car loan. “All the home loan customers will benefit immensely if interest rates on home loans come down by a similar rate. We are expecting banks to cut home loan rates by one per cent from April 1,” he said.Small savers should look at investing their hard earned money in low-risk low-return instruments as they have very few instruments which are as safe as EPF.
