Bank FDs yield positive returns as inflation falls

Returns on FDs are considered positive when banks offer higher rates than inflation while negative returns mean when inflation is higher than interest rates.
Bank FDs yield positive returns as inflation falls

MUMBAI: With recent rounds of interest rate hikes by banks and a fall in inflation, Fixed Deposits (FDs) have started yielding positive returns, making them attractive to investors. Driven by banks’ aggressive drive to attract depositors, interest rates on FDs have now crossed 7% while CPI inflation has fallen below 6%.

Returns on FDs are considered positive when banks offer higher rates than inflation while negative returns mean when inflation is higher than interest rates. Retail inflation, measured by the Consumer Price Index (CPI), eased to 5.88%in November from 6.77%in the previous month. It was 7.4% in September. For the whole year, the RBI expects inflation to be around 6.7%.

Major banks hike FD rates
After the Reserve Bank of India (RBI) hiked the repo rate, the rate at which the central bank lends to banks, by 35 basis points (bps) on December 7, banks have started increasing rates on FDs. Major players in the banking sector including SBI, ICICI, HDFC, Kotak Mahindra Bank, Axis Bank have raised rates on retail deposits up to R2 crore. By raising rates, banks are trying to attract investors who want high returns but are risk averse.

“With equity not generating expected returns in the last 12 months and rising interest rates on the back of elevated levels of inflation, investors are increasing their share of investments in fixed-income instruments,” Ujwal Shah, Fund Manager, IIFL Securities told TNIE.

He added that with global interest rates at record highs this trend may continue for some time. SBI, the country’s largest bank, has raised interest rates on FDs by up to 65 basis points. The bank is now offering interest rates between 3%and 6.75% for regular citizens and 3.50% to 7.25% for senior citizens for FDs with a tenure between 7 days and 10 years.

Kotak Mahindra Bank has also increased rates, and is offering 7%interest on FDs with 390 days, 391 days less than 23 months and 23 months tenures. Commenting on the rate hikes, Virat Diwanji, Group President and Head – Consumer Bank, Kotak Mahindra Bank said, “With the RBI increasing key interest rates, we have passed on the benefit to our valuable customers. This is a savers’ market. Locking money in fixed deposits will help customers earn higher returns on their savings.”

Joining other lenders, ICICI Bank has also raised rates, and it is now offering rates ranging from 3% to 7% on retail deposits for regular citizens and 3.50% to 7.50%for senior citizens for tenure between 7 days and 10 years.

Most of the banks give 50 bps interest to senior citizens over and above the general customers. HDFC Bank is offering interest rates ranging from 3%to 7% for the general public and 3.50% to 7.50%for senior citizens for tenure between 7 days and 10 years. Axis Bank is offering 3.5% to 7%interest rates for the general public on deposits maturing in 7 days to 10 years.

Inflation outlook
The outlook for inflation for the next year suggests that 2023 will be the year of positive returns for depositors as inflation is expected to decline further during the next year while FDs will continue to offer higher rates. As per RBI’s forecast, inflation is expected to be 6.7%in the financial year 2022-23, and it expects prices to fall further in the coming months.

“CPI inflation for Q1:2023-24 is projected at 5% and for Q2 at 5.4%, on the assumption of a normal monsoon,” said RBI in its Monetary Policy Statement released on December 7 this year. While inflation is likely to moderate in coming quarters, rates on FDs are expected to either inch upward or stay at current levels as experts expect more repo rate hikes from the RBI.

“With CPI inflation likely to moderate further supported by base effect and the relief provided by easing global commodity prices, RBI could moderate the pace of rate hike,” said Rajani Sinha, Chief Economist, Care Ratings. However, core inflation and household inflationary expectations still remain high, hence the central bank would remain vigilant on the inflation front,” added Rajani Sinha.

“As the real rate of interest moves to the positive territory, RBI would like to wait and watch the implications of the rate hikes so far. Given the looming uncertainties on the inflation front, we feel that a further 25 bps rate hike in February cannot be ruled out,” she added.

An increase in repo rate by the RBI increases the cost of borrowing for the banks which in turn hikes deposit rates to mobilise funds from the depositors. In a bid to tame inflation, which has stayed above its comfort zone of 2-6%, the central bank has raised the repo rate by 225 bps since April this year.

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