Real returns from FDs hit 6-year low in January as inflation soars, rates fall

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Published: February 14, 2020 1:15:01 AM

Indian depositors last earned positive real returns from term deposits in September 2019 when consumer price index (CPI) inflation stood at 3.99% year-on-year (y-o-y). Thereafter, rising food prices and falling deposit rates in an environment of weak credit offtake have been eating into savers’ returns.

Indian depositors last earned positive real returns from term deposits in September 2019 when consumer price index (CPI) inflation stood at 3.99% year-on-year (y-o-y).

With inflation overshooting the monetary policy committee’s (MPC) target band for the second straight month and banks steadily cutting deposit rates, real returns from fixed deposits (FDs) hit an over six-year low in January. Last month was also the fourth in a row to fetch negative real returns for deposit holders, showed representative data on deposit rates and inflation.

Interestingly, real returns from fixed deposits (FDs) were hovering around a seven-year high of 4.75% just a year ago, in January 2019. At (-)3.32%, the return on a one-year retail term deposit with State Bank of India (SBI) adjusted for tax and inflation was the lowest last month since November 2013, when the return had stood at (-)5.21%. A one-year deposit with SBI in January earned interest at the rate of 6.1%, which works out to a 4.27% effective yield, assuming a tax rate of 30%. A headline consumer inflation rate of 7.59% resulted in a negative return for the depositor.

Indian depositors last earned positive real returns from term deposits in September 2019 when consumer price index (CPI) inflation stood at 3.99% year-on-year (y-o-y). Thereafter, rising food prices and falling deposit rates in an environment of weak credit offtake have been eating into savers’ returns.

The future trajectory of returns from deposits will depend on a play-off between inflation, MPC’s rate actions and the credit growth. Analysts at Nomura on Thursday said inflation has peaked in January and will fall sharply in coming months, allowing the MPC room to lower rates. “Given our view that inflation has peaked while growth is likely to disappoint, we continue to believe the next policy move is still a cut; we expect a 25-bps repo rate cut in Q2 of 2020, which could get delivered as early as April,” Nomura said in a note.

Meanwhile, deposit rates could trend even lower, bankers say. Rajkiran Rai G, managing director and chief executive at Union Bank of India, said that new deposits now are coming at a lower rate. “In the last six months, we have consistently been cutting deposit rates. As we go forward, the reduction in cost of deposits will be substantial,” Rai said, adding, “The rates could come down by (another) 20-25 bps on one-year time deposits as we go forward. It will not happen overnight, but maybe over three-four months.”

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