Ajit Ranade: India’s stubbornly high PF payout rate is getting in the way of its monetary policy

In 2025, the Reserve Bank of India (RBI) cut its benchmark repo rate four times by a cumulative 125 basis points from 6.5% to 5.25%, the most aggressive easing cycle since 2019. Consumer price inflation fell to 1.33% in December. The logic of lower rates was clear: reduce the cost of capital and let monetary easing reach businesses, borrowers and consumers. Monetary transmission, however, requires the entire interest rate architecture to move together; it isn’t.

The EPF rate at 8.25% is 300 basis points above the repo rate. Even the 10-year government bond, which carries duration risk that an EPF depositor does not, yields about 6.7%. The EPF rate exceeds it by 155 basis points. This gap between the market benchmark for long-term sovereign borrowing and a guaranteed administered return on workers’ retirement savings is not a marginal inefficiency but a structural anomaly.

To make the numbers work, the EPFO’s investment sub-committee had to dip into reserves. Retaining the 8.25% rate is projected to produce a deficit of ₹944 crore in what the fund is expected to earn this year against the interest it has decided to pay. This shortfall will be filled by drawing down the surplus carried over from prior years. The deficit has been growing. The four-decade low of the EPF rate was 8.10% in 2021-22. Since then, it has only moved up or stayed put. The ratchet works in only one direction.

This would matter less if the EPFO operated on the margins of India’s savings system. Its corpus stands at about ₹31 trillion.

Total outstanding balances in small savings instruments—Public Provident Fund (PPF), National Savings Certificate, Sukanya Samriddhi Yojana and Senior Citizens Savings Scheme—amount to roughly ₹38 trillion and are projected to grow next year.

Life Insurance Corporation manages a corpus of around ₹60 trillion, much of it in guaranteed-return investment structures. The administered savings universe is not a carve-out. It is the bedrock of Indian household finance.

The consequences run deeper than the EPFO balance sheet.

When a pool this large earns 8.25% on a guaranteed tax-efficient basis, it sets a floor for the entire fixed-income market. Banks cannot aggressively cut deposit rates when formal-sector workers have a safer, better-paying alternative. Corporate bond issuers must price issues above that floor.

How this affects expectations is perhaps more damaging: if the government’s own retirement fund signals 8.25% as a reasonable return, investors will discount corporate bonds, infrastructure finance and long-duration private investment against that benchmark.

Rate cuts work through expectations. A 300 basis point gap between the policy rate and a government guarantee creates the kind of dissonance that prevents monetary easing from translating into private investment.

Since 2001, four separate committees headed by RBI Deputy Governors have recommended linking administered rates to a formula anchored in market benchmarks—typically, a rolling average of G-Sec yields with a modest and transparent spread. The logic is not that workers should earn less, but that rates should move with markets, so that monetary signals can travel through the full savings system. That recommendation was adopted partially for small savings—and shelved each time the formula produced inconvenient results. The EPFO is not even subject to the partial formula.

The contrast with other economies is instructive. Singapore’s Central Provident Fund pegs its Special Account rate to the 10-year government security yield plus 1%; Malaysia’s EPF declares dividends based on actual investment performance; Switzerland calibrates its minimum pension rate by market conditions. Even in countries that administer returns on mandatory savings, the norm is formula-linkage to a market benchmark and not a rate fixed by a politically influential body.

That political economy also shows in the rate differential between EPF and PPF, which is open to ordinary citizens and earns 7.1%, 115 basis points less than the EPF rate. This gap reflects no difference in risk: both are sovereign-guaranteed instruments. It reflects a difference in representation. EPF members have elected trade union officials to sit on the CBT, with a formal voice in the rate decision. PPF investors have none.

The governance structure compounds the problem. The EPF rate is set by the CBT under the Union labour ministry and is then ratified by the finance ministry. This means that the finance ministry concurs with a decision that undermines RBI’s rate cuts.

The question for policymakers is not whether workers deserve good returns—they do. It is whether an artificially high rate funded from reserves and uncoupled from any market formula is a sustainable anchor for such a significant chunk of our savings system. India’s monetary policy committee operates with independence and rigour, but it lacks a coordination mechanism to ensure that the savings system responds, even with a lag, to its signals.

RBI cut rates by 125 basis points last year. The EPF rate did not budge. This gap is a policy inconsistency hiding in plain sight.

The author is senior fellow with Pune International Centre.