The Reserve Bank of India (RBI), in its latest monetary policy review, has projected retail inflation at 5.3% for FY12
Senior citizens and other retail will be on the receiving end with inflation exceeding interest rates based on income from bank fixed deposit (FD) schemes.
The Reserve Bank of India (RBI) in its latest monetary policy review has projected retail inflation for the current fiscal at 5.3%.
Last week, the RBI said consumer price index (CPI) based inflation is now projected at 5.3% for 2021-22 with risks evenly balanced.
At this stage, fixed deposits for one year with the country’s largest lender State Bank of India (SBI) will earn negative interest. The real interest rate for the saver will be (-) 0.3%.
The real interest rate is the card rate minus the inflation rate. Retail inflation stood at 5.3% in August.
Even for the higher tenure of 2-3 years, the interest rate earned is 5.10% lower than the inflation expected for the current financial year.
In the private sector, market leader HDFC Bank offers 4.90% interest rate for fixed deposits of 1-2 years while 5.15% for 2-3 years.
However, small savings schemes run by the government provide better returns than the fixed deposit rates of banks. For fixed deposits of 1-3 years, the interest rate offered is 5.5% higher than the inflation target.
There is a natural advantage of transferring money from bank FDs to government savings schemes as the rates are slightly higher. Thus, the real interest rate is in positive territory.
Experts said it is a common phenomenon that real returns are negative in the post-crisis and recovery world, given the fiscal stimulus to overcome hardship.
India is no exception and in fact, new asset allocation patterns will need to emerge, with more allocation from financial assets to real assets.
Vivek Iyer, Partner, Grant Thornton India, said that real rates are going to be negative for some time, given that post-crisis recovery may take some time and it is imperative that financial literacy initiatives help people make the right investment choices. guide me.
“A negative rate of interest for savers on bank deposits is, these days, a reality that depositors have to face due to complicating factors.
Jyoti Prakash Gadiya, Managing Director, Resurgent India said, “The current average savings deposit rate offered by banks which is around 3.5% and less than 5% on one year deposits indicates negative returns, even That doesn’t even cover the expected inflation rate.”
The impact of negative interest on bank savings deposits is evident, with low growth of such deposits and the public is now looking for alternatives like mutual funds and equities for better returns.
However, the more risky options have shown unprecedented growth that is likely to continue until inflation is contained or there is a substantial increase in bank deposit rates, Mr. Gadia said.
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