Loss of purchasing power of capital invested: Immediate relief not in sight for FD investors

Even the investors having non-taxable income get a negative real rate of return of return.

Fixed deposit (FD) is the mainstay of investments made by conservative investors as well as the investors with low risk taking capacity – like senior citizens. However, the low interest rate regime amid high rate of inflation has put the capital invested by them in trusted bank FDs at a risk of losing purchasing power on maturity.

Affiliate Marketing

So, although the capital invested in FDs of the reputed banks – especially PSU banks – don’t face default risk, investors suffer due to erosion in the purchasing power, as the interest rates offered fail to match the rate of inflation.

Currently, the average interest rate offered by reputed banks on FDs is hovering around 5.5 per cent, while the average rate of inflation is around 7 per cent.

As a result, even the investors having non-taxable income get a negative real rate of return of return, which is -1.4 per cent.

The capital erosion will be even worse for those in 20 per cent tax bracket, because the return they will get after paying 20 per cent tax on interest will reduce to 4.4 per cent, which will push the real rate of return (RRR) down to a further negative zone. So, the RRR for such an investor will be -2.4 per cent.

Understandably, the worst sufferers are the investors in the 30 per cent tax bracket, as the post tax FD rate reduces to 3.85 per cent, resulting in a dismal RRR of -2.94 per cent.

Debt Mutual Funds vs FDs: How tax benefits give debt funds an edge to beat inflation

With the priority of the Reserve Bank of India (RBI) is economic development over controlling inflation, the low interest rate regime is set to continue in the near future. So, the ordeal of the FD investors would also continue till the rate of inflation falls below the FD rate or the RBI decides to increase the key interest rates.

In the near future, however, it’s unlikely that the FD investors would get any relief as in a low interest regime, the big banks won’t offer any higher rate of interest, especially when they are flushed with capital.

“Interest rates will be soft for the time being because banks would like to keep the cost of funds as low as possible. The liquidity position of banks like State Bank of India (SBI) is extremely good. The Reserve Bank of India has reduced repo rates by 175 basis. The small saving rates have been introduced between 80 to 100 basis,” said S Ravi, Former Chairman of BSE and Founder & Managing Partner of Ravi Rajan & Co.

“Banking system as a whole has been able to garner deposits which is reflected by the fact that deposits stand at Rs 150 lakh crore in April 2021. On the other hand credit growth is muted which means deployment opportunities are getting reduced. The banks would like to lend at attractive and soft rates especially in the retail portfolio and large corporate borrowers who have good ratings. This phenomenon would continue at least for a short to medium period of time,” he added.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Source link