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The golden era for the common Indian bank depositor is gone forever


As deposit rates continue to be subdued and real returns turn negative in the wake of rising inflation, the common Indian bank depositor has been left rueing a bitter harvest.

At stake is the future of a time-tested investment instrument that generation after generation of Indians used to keep their money in and generate fairly decent returns over time.

Bank fixed deposit (FD) rates have fallen from 8-10 per cent per annum a few years ago to 5-7 per cent per annum currently, says Jimmy Patel, MD & CEO, Quantum Mutual Fund. For most of India’s senior citizens, FDs are the primary investment, and current rates are not viable because of paltry real returns, he adds.

Inflation levels have remained above the 6 per cent mark in recent months amid supply-side shocks — consumer inflation in July was around 7 per cent, with food inflation coming in slightly higher at 9.6 per cent. With interest on most deposits currently below 6 per cent, investors are getting negative returns on their savings.

A major share of the blame can be apportioned to the RBI’s largely accommodative monetary policy over the past year. The central bank has cut rates by 250 bps since February 2019 with the most aggressive reductions coming during the Covid-19 lockdown.

Additionally, there has also been massive liquidity injections into banks. This has resulted in the fixed deposit rates for even leading Indian banks to drop down to the rate on savings accounts.

Punjab National Bank MD SS Mallikarjuna Rao, speaking at an event organised by Business Standard, called the possibility of savings rate going below 3 per cent an “alarming situation”. Emerging economies like ours need major contributions from savers, but inflation hands these key contributors a raw deal, he added.

Union Bank of India MD & CEO Rajkiran Rai, at the same event, highlighted the importance of real interest rates in a high-inflation country like India. According to him, the current rates won’t attract depositors unless inflation level is around 2 per cent.

With clear signs in place that the golden era is at an end for the bank FD, many investors have already begun to look for greener pastures. And given what some top finance honchos have to say, every other investment avenue is beginning to look better than the FD.

It will be a stretch to think that FDs will ever return to their former glory, and it may be time for investors to look elsewhere to park their savings, says Amitabh Chaudhry, MD and CEO of Axis Bank. Those who have based their retirement plans on bank FDs would do well to save more as returns may disappoint in a system flushed with liquidity, he advises.

“Deposit rates reflect where RBI is taking them, and they are taking them there, because they want the borrowing rates to come down. I think this is a new normal. I do not think you will ever see 10-12 per cent interest rates come back because the world has seen even if you pump in excess liquidity, you can manage inflation,” said Chaudhry.


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