FDs fail to keep pace with retail inflation, money invested to lose value

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Published: July 16, 2020 1:53 PM

The situation is particularly alarming for senior citizens as their hard earned retirement corpus would be eaten up by high inflation and taxes.

fixed deposit, FD, bank FD, FD investment, value of investment on maturity, purchasing power of money, inflation, retail inflation, repo rate, tax on interest, retirement corpus, SBI FD rates, HDFC Bank FD rates, ICICI Bank FD ratesMoney invested in FDs would lose value as the purchasing power of maturity amount would be lower than the purchasing power of the money invested.

It is a bad situation for investors who prefer safety of investments over return as the money invested in most fixed-return instruments would lose value as the purchasing power of maturity amount would be lower than the purchasing power of the money invested due to a wide gap between the rate of retail inflation – at 6.09 per cent in June – in comparison to current repo rate of 4 per cent.

Normally, repo rate remains close to rate of inflation and the interest rate offered by financial institutions marginally over the repo rate would provide a slightly higher rate over the rate of inflation.

However, with repo rate down over 2 per cent below the rate of retail inflation, the rate of interest offered on bank fixed deposits (FDs) itself lag behind the rate of price rise and after paying taxes on interest, the value of money invested would lose much of its value on maturity.

The situation is particularly alarming for senior citizens as their hard earned retirement corpus would be eaten up by high inflation and taxes.

Just to keep the purchasing power intact by keeping same pace with inflation at 6.09 per cent, a person in nil tax bracket needs to get the same interest rate on FD, while a person in 5 per cent tax bracket needs to get 6.41 per cent, a person in 20 per cent tax bracket needs to get over 7.61 per cent and a person in 30 per cent tax bracket needs to get 8.7 per cent FD rate.

The interest rates offered by some leading banks are as follows:

State Bank of India

Currently, the highest rate offered by the State Bank of India (SBI) is 5.4 per cent on FDs between 5 years and 10 years, while senior citizens get 6.2 per cent on the same investment.

HDFC Bank

The HDFC Bank is currently offering the highest rate of 5.5 per cent on FDs between 5 years and 10 years, while senior citizens get 6.25 per cent on the same investment.

ICICI Bank

Currently, the highest rate offered by the ICICI Bank is 5.5 per cent on FDs between 5 years and 10 years, while senior citizens get 6.3 per cent on the same investment.

So, only senior citizens in nil tax bracket would only gain, while all other investors would see the value of money invested getting deteriorated on maturity if the current level of 6.09 per cent retail inflation persists.

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