A key ally of the ruling United Progressive alliance coalition pointed to a 1 percentage point rise to 9.5 percent, taking the bond market by surprise.

But Labour Minister Chandrashekar Rao said a final decision on the issue would be taken after a meeting with the prime minister and finance minister, adding that his ministry had proposed the rate be increased to 9.5 percent.

A senior communist leader, who led a team of trade union leaders to meet Prime Minister Manmohan Singh, said he expected the Employees Provident Fund (EPF) rate to be increased before the budget session of parliament starts in February 2005.

Indian bonds weakened after Dasgupta's comments. India's bond markets have been eagerly awaiting a decision because a higher EPF rate skews bank rates upwards.

A spokesman of Singh confirmed it wold be increased, but did not say when it would take place or by how much it would be raised. Labour Minister Rao also did not give a date or the size of the increase in the pension fund rate.

Analysts say an EPF rate hike could be used by Singh's coalition government to appease its demanding communist supporters and push ahead with tough reforms, especially of foreign investment limits in telecommunications and insurance.

India's left-leaning unions, whose already-significant clout has been boosted by the record national election performance of the communists in May, have been pressing for a higher EPF rate.