Are your bank fixed deposit yields still beating inflation?
As the Reserve Bank of India (RBI) hiked the repo rate consecutively twice in two months, banks started raising interest rates on home loans and simultaneously started raising their fixed deposit rates as well. (FD).
This is the second time now that banks have hiked FD rates, after the RBI hiked the interest rate twice in May 2022.
The State Bank of India (SBI) raised FD rates from 5.10% to 5.30% on one-year to less than 2-year deposits, representing a jump of 20 basis points (bps).
HDC Bank also raised FD rates from 5.10% to 5.35% on deposits of 1 year to less than 2 years, an increase of 25 basis points, while Kotak Mahindra Bank raised its FD rates from 10 basis points, with a duration of one. year a month, from 5.65 percent to 5.75 percent.
Similarly, the Punjab National Bank (PNB) has raised interest rates on FDs maturing in one to two years and up to three years by 10 to 20 basis points. The PNB also raised its FD rates from 5.20% to 5.30%, on deposits maturing in one year and up to two years, an increase of 10 basis points. On deposits maturing in two years and up to three years, the PNB raised the interest rate by 20 basis points, from 5.30% to 5.50%.
Others, such as DBS Bank and the Central Bank of India, have recently hiked interest rates by as much as 50 basis points for various mandates. For DBS Bank, for terms between one year and 375 days, rates were raised by 20 basis points to 5.3%, while for terms between 276 days and less than two years, rates were raised to 5.50%. For maturities between one year and less than two years, the Central Bank of India offers a yield of 5.20%, while for a maturity of two to three years, it offers an interest rate of 5. 30% on his DF.
But are your returns still beating inflation?
According to experts, FD yields are not yet able to match inflation-beating returns.
Adhil Shetty, CEO of Bankbazaar.com, however, said that “as market liquidity decreases, there will be more deposit needs.”
“And we will see deposit rates go up. Over time, as inflation peaks, it is possible that FD rates will rise above inflation,” he adds.
As of now, India’s retail price inflation rate in May has come down to 7.04%, according to government data. Consequently, the inflation rate continues to hover above seven percent. Inflation is expected to cross the 8% mark in the coming months due to supply constraints and high crude oil prices.
However, experts believe that if one is concerned about inflation eating away at one’s investment returns, one might consider investing in a combination of stocks, gold and bond mutual funds to achieve better returns. yields.
Real return versus inflation
Inflation erodes your investment returns. Suppose you invest Rs 1,000 for one year with a return of 6%. This means that you will receive your principal of Rs 1,000 and interest of Rs 60 – in all, Rs 1,060 at the end of a year. Assuming the inflation rate is eight percent, this means that the value of Rs 1,000 will have decreased by eight percent. Another way of looking at it is that if you could buy a number of goods for Rs 1,000, you would now need to spend Rs 1,080 to buy them. This means that despite gaining Rs 60 in interest, the purchasing power of your investment has dropped by Rs 20. So in this case, the actual returns are not 6%, but minus (-) 2% after taking inflation into account. .
If the real returns continue to be negative, then despite the high nominal return, you will have less money to spend than expected because the cost of goods and services would have increased at a much faster rate than the size of your corpus.
Will FD rates rise further?
Yields on bank FDs are well below inflation. Also taking into account the tax, FD returns may very well be negative. So unless FD returns are at least two percentage points higher than inflation, they will not be an investment in the proper sense of the word.
That said, FDs are still viable for short-term capital protection, such as emergency parking funds. “As interest rates are on an upward trajectory, it is best to ladder investments and invest them over shorter periods of time so that they can be reinvested at maturity to earn higher returns. Laddering s It will also take care of liquidity issues and periodically provide you with regular returns,” says Shetty.