Keep an eye on your bank FD - it will fetch negative interest

If you have parked your money in bank fixed deposits, take note.

The Reserve Bank of India (RBI) in its latest monetary policy review has projected retail inflation at 5.3 per cent for this fiscal, which means fixed deposits for one year with State Bank of India (SBI) would earn negative interest.

The real interest rate – card rate minus inflation rate – would be (-) 0.3 per cent for the depositer. Retail inflation for August stood at 5.3 per cent.

Even for higher tenure years, the interest rate earned is 5.10 per cent lower than the expected inflation for the current fiscal, a PTI report pointed out.

In this scenario, small savings schemes run by the government are more attractive, as they offer better returns compared to bank fixed deposits. For term deposits of 1-3 years, the interest rate offered is 5.5 per cent higher than inflation target.

According to Grant Thornton Bharat partner Vivek Iyer quoted in the report: “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.”

Another expert, Resurgent India Managing Director Jyoti Prakash Gadia, was reported as saying: “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 5 per cent rate on one year deposit, indicates a negative return, not even covering the expected inflation rate.”

With retail inflation exceeding the interest rates, and negative interest on bank savings deposits, the public would prefer alternatives such as mutual funds and equity. “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 said.

Also read: Retail inflation eases to 4.35% in September, food prices ease