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PF cash adds fuel to market on fire

New Delhi, Jan. 28: The stock market was whooping with delight today in a dollar shower. When it reopens on Monday, there could be some more wild whoops as there wasn't enough time today to celebrate the freedom given to non-government provident and pension funds to invest in stocks.

Such funds have been allowed to park up to 5 per cent of their reserves in the stock market and another 10 per cent in corporate debt and equity-linked mutual funds.

Quick estimates suggest the move will free some Rs 6,000 crore for investment in the stock market, which has shaken off its new year blues ' the sensitive index zoomed 180 points today to 6419.

Foreign institutional investors, the pivot of the market, reappeared to put the zing back into the market buoyed by strong corporate results. The government-owned State Bank of India set off Friday's string of good news with a 20 per cent jump in net profit.

Later in the day, the government announced that non-government provident, superannuation and gratuity funds could invest 'an amount of up to 5 per cent of their total portfolio in shares of companies with an investment grade rating from two credit rating agencies'.

The biggest non-government provident fund ' the Employees Provident Fund (EPF) ' is known to be exceptionably conservative and it remains to be seen if its trustees will choose to use the relaxed rules. The investment freedom given is an enabling provision and need not be followed by the trustees.

Besides the huge EPF, with a corpus of Rs 100,000 crore and some 40 million members, several companies have their own provident and superannuation funds.

The EPF trust is already in the middle of a row between the finance ministry and the Left parties, which are supporting the Manmohan Singh government, over the interest rate paid on EPF deposits. The government has been resisting pressures to raise it beyond 8.5 per cent, a level it thinks is already too high given that there is a difference of something like 3 per cent with bank interest rates.

Officials said the move has been taken following a fall in the prices of government bonds where most of the PF money is invested. 'This will allow them greater avenues of investment,' they said.

The finance ministry has been pushing for the measure for the past few years, but the trustees of funds like the EPF have staunchly opposed it on grounds that it is too risky to invest in the stock market.

The Left, which is demanding that the interest rate be hiked to 9.5 per cent, is horrified by the idea of playing the market with money that represents post-retirement future for employees.

Ministry officials point out that if the EPF were to continue to pay a higher interest rate, the only way it can do so is by earning more, which is possible through astute stock investments, as pension funds do the world over.

Many such international funds are investing in the Indian market. It was because of foreign institutional investors that the market saw such a sharp rise today. They are estimated to have pumped some Rs 300 crore into the market.

The initial days of January were bad, but now it appears foreign investors are returning with corporate results in the US being not too impressive.

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