The finance ministry is likely to give its consent to maintain an unchanged rate of interest on Employees Provident Fund at 9.5 per cent at the forthcoming meeting of the Central Board of Trustees of the Fund, slated for June 30.

The meeting will take a view on the final applicable rate of interest for the depositors to the Fund.

An internal paper being prepared by the EPF on the projected investment and returns scenario, says the Fund could just support an annual 9 per cent rate of return for the current fiscal and still maintain its solvency.

It says any returns beyond that would be unfeasible. As on 31 March, 2004, the total funds under management of the EPF was Rs 1,28,036 crore (Rs 1,280.36 billion).

Of this over 83 per cent, or Rs 1,06,809 crore (Rs 1,068.09 billion) were largely invested in Special Deposit Schemes, central and state government securities and in the Public Account of the Centre.

The rest was invested in debt papers of public sector undertakings.

Analysing the trends in the returns from each category, the paper argues that even the 9 per cent option has its perils. Instead to maintain the long-term viability of the Fund, the interest rate regime for the depositors should not be more than about 8 per cent per annum.

Senior finance ministry officials said they had only an advisory role in setting the rate of interest by the CBT.

But they would draw the attention of the fund to immediately redeploy the funds in market interest linked instruments, which have better returns than government securities.

The officials acknowledged that a crisis was in the offing in the EPF as it had exhausted all its surplus and suspense account in the past two years, to maintain the 9.5 per cent rate.

But not much progress was expected in the CBT meeting to resolve the same. They also said that it was unlikely that a bail out similar to the Unit Trust of India would be needed for the EPF.

Speaking on the issue, member of the CBT and secretary of the CPI-M affiliated, Centre of Indian Trade Unions, W R Varadarajan said he was aware that in the current low interest rate regime, even an 8 per cent rate was impossible to sustain.

The Citu has been strongly pressing for not only sustaining the current rate of interest but also raising it at 12 per cent. He said a higher rate of interest would need an explicit subsidy from the Centre.

According to Varadarajan, the government must therefore transfer the entire fund management role of the EPF to the Reserve Bank of India.

He said the expenditure on meeting the gap between the earnings of the EPF and its pay out to depositors had to be provided as a social security net to meet the long- term needs of the industrial workers.