Fixed deposit (FD) is the mainstay of investments made by conservative investors as properly as the investors with low threat taking capacity – like senior citizens. However, the low interest price regime amid higher price of inflation has place the capital invested by them in trusted bank FDs at a threat of losing buying energy on maturity.
So, though the capital invested in FDs of the reputed banks – particularly PSU banks – do not face default threat, investors endure due to erosion in the buying energy, as the interest prices supplied fail to match the price of inflation.
Currently, the typical interest price supplied by reputed banks on FDs is hovering about 5.5 per cent, even though the typical price of inflation is about 7 per cent.
As a outcome, even the investors getting non-taxable revenue get a damaging true price of return of return, which is -1.4 per cent.
The capital erosion will be even worse for these in 20 per cent tax bracket, for the reason that the return they will get soon after paying 20 per cent tax on interest will lessen to 4.4 per cent, which will push the true price of return (RRR) down to a additional damaging zone. So, the RRR for such an investor will be -2.4 per cent.
Understandably, the worst sufferers are the investors in the 30 per cent tax bracket, as the post tax FD price reduces to 3.85 per cent, resulting in a dismal RRR of -2.94 per cent.
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With the priority of the Reserve Bank of India (RBI) is financial development more than controlling inflation, the low interest price regime is set to continue in the close to future. So, the ordeal of the FD investors would also continue till the price of inflation falls beneath the FD price or the RBI decides to raise the important interest prices.
In the close to future, having said that, it is unlikely that the FD investors would get any relief as in a low interest regime, the major banks will not supply any larger price of interest, particularly when they are flushed with capital.
“Interest rates will be soft for the time being because banks would like to keep the cost of funds as low as possible. The liquidity position of banks like State Bank of India (SBI) is extremely good. The Reserve Bank of India has reduced repo rates by 175 basis. The small saving rates have been introduced between 80 to 100 basis,” mentioned S Ravi, Former Chairman of BSE and Founder & Managing Partner of Ravi Rajan & Co.
“Banking system as a whole has been able to garner deposits which is reflected by the fact that deposits stand at Rs 150 lakh crore in April 2021. On the other hand credit growth is muted which means deployment opportunities are getting reduced. The banks would like to lend at attractive and soft rates especially in the retail portfolio and large corporate borrowers who have good ratings. This phenomenon would continue at least for a short to medium period of time,” he added.