India’s provident fund payout: A rate that doesn't bend

The EPFO’s rate of interest must track market dynamics for it not to weaken monetary policy transmission

- AJIT RANADE

Last week, the Central Board of Trustees (CBT) of India’s Employees’ Provident Fund Organisation (EPFO) fixed the fund’s interest-rate payout at 8.25% for 2025-26, the third year in a row at that rate. The decision covers the retirement savings of 73.7 million formal-sector workers. It was received, as usual, with union relief. But can India’s monetary policy work when so large a part of its savings system is immune to it?

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.