Real returns from FDs remain negative for 10 straight months

The return on a one-year retail term deposit with SBI adjusted for tax and inflation stood at -3.12% in August.The return on a one-year retail term deposit with SBI adjusted for tax and inflation stood at -3.12% in August.

As inflation continues to hold above the monetary policy committee’s (MPC) tolerance band and deposit rates fall nonetheless, savers are being given the short shrift. August was the tenth straight month of negative real returns from fixed deposits (FDs). The trend may persist longer as banks, including State Bank of India (SBI), have cut rates even in September.

The return on a one-year retail term deposit with SBI adjusted for tax and inflation stood at -3.12% in August. A one-year deposit with the country’s largest lender earned interest at the rate of 5.1%, which works out to a 3.57% effective yield, assuming a tax rate of 30%. The headline consumer inflation rate of 6.69% resulted in a negative return for the depositor. SBI has again reduced the interest rate on September 10 on one-year term deposits to 4.9% and this could hit returns further.

In a report dated July 31, SBI’s research wing had said that negative real interest rates are likely to become the new norm. This will be a result of household savings continuing to rise in India despite lower rates on deposits. It is important to keep real rates negative at present as it could have a “sobering” effect on asset quality, the report added.

“..it is largely believed that positive real interest rates act as an enabler of household savings if the substitution effect, in which saving increases as consumption is postponed to the future, dominates the wealth effect in which savers increase current consumption at the expense of saving. Paradoxically, in the current context, people are increasing their savings even as we are facing negative real interest rate as people are saving money as a precautionary motive,” the SBI report said.

It added that the incremental small savings deposits have significantly slowed down as a percentage of incremental deposits with scheduled commercial banks (SCBs) in the current fiscal, with people parking more money in liquid bank deposits rather than locking them in financial savings. According to data released by the Reserve Bank of India (RBI), deposits with banks stood at Rs 140.80 lakh crore as on August 14, up 11.04% year-on-year (y-o-y).

Banks are lowering deposit rates in order to protect margins at a time when the system is flooded with liquidity. Loan growth is limited and much of the money with banks is flowing into low-yielding government securities, with the current level of statutory liquidity ratio (SLR) being 29%. The liquidity surplus in the banking system for the fortnight ended August 14 stood at Rs 3.27 lakh crore, according to Care Ratings. “Additionally, the banking system liquidity is expected to remain in a surplus position aided by sustained growth in bank deposits as against slower growth in the bank credit off-take,” the rating agency said.

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