Real returns from FDs remain in the red: Savers reliant on bank deposits continue

The government may have reversed its decision to lower rates of small savings schemes, but savers who rely on bank deposits continue to lose. February was the 10^th straight month of negative real returns from fixed deposits (FDs). While some lenders like State Bank of India (SBI) and Housing Development Finance Corp (HDFC) have raised deposit rates in recent months, next week’s monetary policy review could determine the future course of rates.

The return on a one-year retail term deposit with SBI adjusted for tax and inflation stood at -1.53% in August. A one-year deposit with the country’s largest lender earned interest at the rate of 5%, which works out to a 3.5% effective yield, assuming a tax rate of 30%. A headline consumer inflation rate of 5.03% resulted in a negative return for the depositor. Depositors lose relatively less now as inflation has eased from the highs seen in the latter half of 2020 and repo rate cuts have not happened.

After the February monetary policy, Reserve Bank of India (RBI) governor Shaktikanta Das had fielded a question on whether the central bank’s focus on the “orderly evolution of the yield curve” was hurting savers. He had pointed to the small savings schemes as an investment avenue. “When the banks are reducing their lending rates, naturally, part of it also goes to the savers. We must also recognise that the small savings schemes, which the government runs or the RBI deposits schemes which we run, are other avenues and small investors, small savers can use those facilities,” he said.

In January, SBI raised its one-year FD rate by 10 bps to 5% and HDFC recently raised deposit rates by up to 25 bps. Few others have moved rates upwards so far. Moreover, the shadow of inflation looms large, with some monetary policy committee (MPC) members having expressed their concerns around it. In a note on Wednesday, Moody’s Investors Service said inflation has been benign through much of Asia, but this may be set for a change. “India and the Philippines are exceptions. In these economies, inflation is above comfort levels, adding to the list of challenges for policymakers,” Moody’s said.

The negative returns from deposits have been accompanied by a drop in household savings. The household financial savings rate slid to 10.4% of gross domestic product (GDP) in Q2FY21 from 21% in Q1 in a counter-seasonal manner, RBI said in an article in its March bulletin, as consumption rose after the withdrawal of lockdowns and other restrictions.