Real returns from FDs remain negative for 6 straight months

By: |
April 16, 2020 3:11 AM

A one-year deposit with the country's largest lender earned interest at the rate of 5.7%, which works out to a 3.99% effective yield, assuming a tax rate of 30%.

The return on a one-year retail term deposit with State Bank of India (SBI) adjusted for tax and inflation stood at -1.92% at the end of March. The return on a one-year retail term deposit with State Bank of India (SBI) adjusted for tax and inflation stood at -1.92% at the end of March.

Even as consumer inflation eased, there was little relief for Indian savers who continued to draw negative real returns from fixed deposits (FDs) for the sixth straight month in March as banks lowered deposit rates. Nonetheless, the blow was softened to an extent by falling consumer prices, with returns improving from a six-month low in January 2020.

The return on a one-year retail term deposit with State Bank of India (SBI) adjusted for tax and inflation stood at -1.92% at the end of March. A one-year deposit with the country’s largest lender earned interest at the rate of 5.7%, which works out to a 3.99% effective yield, assuming a tax rate of 30%. A headline consumer inflation rate of 5.91% resulted in a negative return for the depositor.

Bankers point to a surfeit of liquidity and falling lending rates as the reasons behind lower deposit rates. On March 27, the Reserve Bank of India (RBI) slashed the repo rate by 75 basis points (bps) and banks were quick to pass on the cut to borrowers as well as depositors. Certificates of deposit (CDs), too, have turned cheaper, with the one-month CD rate sliding to 4.7% in April from around 5.5% in October 2019. Earlier this month, rates on small savings schemes were lowered, effectively giving banks more elbow room to cut deposit rates.

The lower rates, coupled with the moratorium imposed on Yes Bank, took a toll on mid-sized private banks like IndusInd Bank and RBL Bank, who lost deposits held by some state governments. Deposits grew at their slowest pace since June 2018 — 7.93% y-o-y — during the fortnight ended March 27.

Public-sector banks (PSBs) say they have not seen deposits being impacted by lower rates. VS Khichi, executive director, Bank of Baroda, said, “It is still too early to gauge the impact of rate cuts on deposits. At this point of time, there are no alternate avenues which people are looking at (for investments). We will know it only once things normalise.”

Chalasani Venkat Nageswar, deputy managing director for international banking and chief financial officer, SBI, said that the future trajectory of deposit rates will hinge on how other asset classes perform. “Further cuts will be a function of liquidity that is available and also the market rates. Since financial savings are distributed among various asset classes, the growth of deposits depend on market dynamics,” he said.

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