Discount rate is one of the crucial financial assumptions in an actuarial valuation and is used to discount the expected future cash flows to arrive at the present value of obligation of employee benefit plans. This rate is determined with reference to market yields on government bonds at the balance sheet date and hence is re-evaluated at every valuation date.
We have seen an increasing trend in the yields on the government bonds during the last year and the rates are now stabilizing well around 7.5% for the current period. The below graph shows the comparison of yields at different dates. As at 31st March 2022, the discount rates were mostly in the range of 6.4% to 7.4% but for 31st March 2023 this range has increased to 7.3% to 7.5% for most of the valuations. The increased discount rates provide companies with a chance to improve their salary increment assumptions which were reduced during the pandemic.
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