Inflation impact: Deposits earning decline

Common man is losing on savings

Inflation , the rate of price rise, is also considered as the scale at which the real value of the rupee erodes, economists say adding that inflation is much higher than the maximum interest being paid on deposits by a bank or any government saving scheme, including the provident fund.

Real rate of interest is defined as deposit rates minus the rate of inflation , which is over 11 per cent for the week ended June 7. For those depending on earning from deposits, such as elderly people and pensioners, the real rate of interest has been negative.

Short-term rates are low so to ease pressure on depositors banks have increased rates recently, UCO Bank Chairman and Managing Director S K Goel told PTI. Still there is pressure on deposits rates till inflation ary expectation eases, he said.

To maintain the attractiveness of short term fixed deposits, banks would need to tinker with the rates, he added. Fixed deposits for less than one year, which attracts rate around 7 per cent, has been earning negative returns since inflation had crossed 7 per cent.

Inflation touched 7 per cent during the week ended March 22 this year. HDFC Bank Chief Economist Abheek Barua said with persisting high inflation banks would need to do significant reprising of deposits rates to attract fresh deposits especially short term deposits.

There could be hike in deposits rates about 50 basis points and subsequently lending rate would also be adjusted accordingly, he said.