The elderly and others dependent on income from fixed bank deposit (FD) schemes will be the beneficiaries, with retail price inflation exceeding interest rates.
The Reserve Bank of India (RBI) in its latest monetary policy review projected retail inflation at 5.3 percent for the current fiscal year.
Last week, the RBI said that inflation based on the Consumer Price Index (CPI) is now expected to hit 5.3% for 2021-2022, with risks balanced.
At this level, the one-year term deposit with the country’s largest lender, the State Bank of India (SBI) would rather earn negative interest. The real interest rate would be (-) 0.3 percent for the saver.
The actual interest rate is the rate on the card minus the rate of inflation. Retail price inflation for August stood at 5.3 percent.
Even for senior terms of 2 to 3 years, the interest rate charged is 5.10 percent lower than expected inflation for the current year.
In the private sector, market leader HDFC Bank offers an interest rate of 4.90 percent for 1 to 2 year term deposits and 5.15 percent for 2 to 3 years.
However, small government-run savings plans offer a better return compared to the banks’ fixed deposit rates. For 1 to 3 year term deposits, the proposed interest rate is 5.5% above the inflation target.
There is a natural benefit to transferring money from FD bank to government savings programs, as the rates are slightly higher. Thus, the real interest rate is in positive territory.
Experts said it is a usual phenomenon for real returns to be negative in a world in crisis and after the recovery, given how fiscal stimulus has been successful in overcoming the difficulties.
India is no exception and in fact new models of asset allocation are expected to emerge, with more allocation to real assets from financial assets.
Real rates are going to be negative for a while, as post-crisis repairs can take some time and it is imperative that financial literacy initiatives guide people to make the right investment choices, said Vivek Iyer, partner of Grant Thornton Bharat.
“A negative interest rate, for savers on bank deposits these days, is a reality, which depositors face due to a complex set of factors.
“The current average savings deposit rate offered by banks, which is around 3.5% and less than 5% on a one-year deposit, indicates a negative return, not even covering the inflation rate. expected, “said Jyoti Prakash Gadia, Managing Director of Resurgent India.
The impact of negative interest on bank savings deposits is evident, with slower growth in these deposits and the public is now looking for alternatives like mutual funds and stocks for better returns.
The options, while involving more risk, have shown phenomenal growth that is expected to continue until inflation is brought under control or bank deposit rates are significantly increased, Gadia added.
This story was posted from an agency feed with no text editing. Only the title has been changed.
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