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Bank FD to fetch negative real interest with elevated inflation

The Reserve Bank of India (RBI) in its latest monetary policy review has projected retail inflation at 5.3 per cent for the current financial year.

Topics
Inflation | Fixed Deposit | fixed deposit rates

Press Trust of India  |  New Delhi 

Indian Rupee

Senior citizens and others depending upon income from bank (FD) schemes will be at the receiving end with the retail exceeding the interest rates.

The Reserve Bank of India (RBI) in its latest monetary policy review has projected retail at 5.3 per cent for the current financial year.

Last week, the RBI said that the Consumer Price Index (CPI)-based is now projected to be at 5.3 per cent for 2021-22 with risks evenly balanced.

At this level, the for one year with the country's largest lender State Bank of India (SBI) would rather earn negative interest. The real interest rate would be (-) 0.3 per cent for the saver.

Real rate of interest is card rate minus inflation rate. The retail inflation for August stood at 5.3 per cent.

Even for higher tenure 2-3 years, the interest rate earned is 5.10 per cent lower than expected inflation for the current fiscal.

In the private sector, the market leader HDFC Bank offers 4.90 per cent interest rate for 1-2 year fixed deposits while 5.15 per cent for 2-3 years.

However, small savings schemes run by the government offers better return compared to rates of banks. For term deposits 1-3 years, the interest rate offered is 5.5 per cent higher than inflation target.

There is natural advantage of moving money from bank FD to government saving schemes as rates are slightly higher. Thus, the real rate of interest is in the positive territory.

Experts said that it is a usual phenomenon that real returns are negative in a crisis and post-recovery world, given the way fiscal stimulus to overcome difficulty.

India is no exception and in fact, new asset allocation patterns would need to emerge, with more allocation to real assets from financial assets.

Real rates are going to be negative for a while, given that the post crisis repairs may take some time and it is imperative that financial literacy initiatives guide people into making the right investment choices, Grant Thornton Bharat partner Vivek Iyer said.

"A negative rate of interest, for savers on bank deposits, these days, is a reality, which the depositors have to face because of a complex set of factors.

"The present average savings deposit rate offered by banks which is around 3.5 per cent and less than five per cent rate on one year deposit indicates a negative return, not even covering the expected inflation rate," Resurgent India Managing Director Jyoti Prakash Gadia said.

The impact of negative interest on bank savings deposits is obvious, with lower growth of such deposits and the public now seeking alternatives like mutual funds and equity for better returns.

The options although involving more risk have shown phenomenal growth which is likely to continue till inflation is tamed or bank deposit rates are substantially increased, Gadia added.

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

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First Published: Tue, October 12 2021. 17:58 IST
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