As the Reserve Bank of India (RBI) increased the repo rate consecutively twice over two months, banks began hiking the home loan interest rates, and simultaneously, also began increasing their fixed deposits (FD) rates.
This is the second time now that banks have hiked the FD rates, after the RBI increased interest rate twice in May 2022.
The State Bank of India (SBI) has hiked FD rates from 5.10 per cent to 5.30 per cent on deposits of one year to less than 2 years, which is a jump of 20 basis points (bps).
HDC Bank has also hiked FD rates from 5.10 per cent to 5.35 per cent on deposits of 1 year to less than 2 years, an increase of 25 bps, while Kotak Mahindra Bank has increased its FD rates by 10 bps, with a tenor of one year one month, from 5.65 per cent to 5.75 per cent.
Likewise, Punjab National Bank (PNB) has increased interest rates on FDs maturing in one to two years and up to three years by 10-20 bps. PNB has also hiked its FD rates from 5.20 per cent to 5.30 per cent, on deposits maturing in one year and up to two years, which is a hike of 10 bps. On deposits maturing in two years and up to three years, PNB has increased the interest rate by 20 bps, from 5.30 per cent to 5.50 per cent.
Others, such as DBS Bank and Central Bank of India have recently hiked their interest rates by up to 50 bps for various tenures. For DBS Bank, for tenures between a year and 375 days, the rates have been hiked by 20 bps to 5.3 per cent, while for tenures between 276 days and less than two years, the rates have been hiked to 5.50 per cent. For maturity tenure between a year and less than two years, the Central Bank of India is giving a return of 5.20 per cent, while for two to three years maturity period, it is offering an interest rate of 5.30 per cent on its FDs.
But Are Your Returns Beating Inflation Yet?
According to experts, FD returns are unable to match inflation-beating returns as of yet.
Adhil Shetty, CEO, Bankbazaar.com, however, says that “as liquidity in the market will decrease, there will be more need for deposits.”
“And we’ll see deposit rates go up. Over time, as inflation peaks, there is a chance that FD rates may be higher than inflation,” he adds.
At present, India’s retail inflation rate in the month of May eased to 7.04 per cent, according to the government data. Hence, inflation rate still continues to hover above seven per cent. Inflation is likely to cross the eight per cent mark in the coming months on the back of supply constraints and high crude oil prices.
However, experts feel that if one is concerned about inflation eating away the returns on his/her investments, then one could consider investing in a mix of equity, gold, and debt mutual funds to earn better returns.
Real Return Versus Inflation
Inflation erodes returns from your investments. Say you invest Rs 1,000 for a year at six per cent return. This means you will receive your principal of Rs 1,000 and an interest of Rs 60 – in all, Rs 1,060 at the end of a year. Assuming the rate of inflation is eight per cent, it means that the value of Rs 1,000 will have reduced by eight per cent. Another way to look at it is that if you could buy a certain number of goods for Rs 1,000, you would now need to spend Rs 1,080 to buy them. This means that despite earning Rs 60 as interest, the purchasing power of your investment has fallen by Rs 20. So, in this case, the real returns aren’t six per cent, but negative (-) 2 per cent after accounting for inflation.
If the real returns continue to be in the negative, then despite the nominal return being high, you will have less money to spend than expected, as the cost of goods and services would have increased at a rate much faster that the size of your corpus.
Will FD Rates Rise Further?
Returns from bank FDs are way below inflation. Accounting for tax as well, the returns from FDs may very well be negative. So, unless FD returns are at least a couple of percentage points higher than inflation, they will not be an investment in the true sense.
That said, FDs are still viable for short-term capital protection, such as in case of parking emergency funds. “As interest rates are on an upward track, it is best to ladder investments and invest them for shorter periods so that you can reinvest them on maturity to get higher returns. Laddering will also take care of liquidity issues and provide you with regular returns periodically,” says Shetty.
