Fixed deposits fetching negative real return! RBI saves FD investors from going deeper into crisis

Due to high inflation and low FD rates, retail investors below the age of 60 years are already getting a negative Real Rate of Return.

As per the inflation data released by the government in June, the retail inflation or Consumer Price Index was as high as 6.09 per cent, which has not only racked the Fixed Deposit (FD) investors but also forced the Reserve Bank of India (RBI) to keep the key policy rates unchanged by giving inflation a priority over growth concerns.

With highest FD interest or around 5.5 per cent (around 6.25 per cent for senior citizens) offered by leading banks – like State Bank of India (5.4 per cent and 6.2 per cent), HDFC Bank (5.5 per cent and 6.25 per cent) ICICI Bank (5.5 per cent and 6 per cent) – on FD tenure of 5-10 years, investors below the age of 60 years are already getting returns at a negative Real Rate of Return (RRR) after adjusting the inflation, while senior citizens are getting near zero RRR before paying tax.

For example, at the inflation rate of 6.09 per cent and State Bank of India (SBI) FD interest rate of 5.4 per cent, the retails investors below 60 years of age are getting RRR of -0.65 per cent, while the RRR at the FD interest rate of 6.2 per cent will be slightly over 0.1 per cent for Senior Citizens for the FD tenure between 5 years and 10 years.

For other tenures, the RRR will be negative even for Senior Citizens and far more negative for retail investors below 60 years of age.

For example, SBI is currently offering lowest interest rate of 2.9 per cent to retail investors and 3.4 per cent to Senior Citizens on FD with tenure of 7 days to 45 days.

At this rate the RRR on FD will be -3 per cent for retail investors below 60 years of age and -2.53 per cent for Senior Citizens.

Another irony for the FD investors is that, even when they are getting a negative RRR, they have to pay tax on full interest.

So, on the FD rate of 5.4 per cent, a retail investor below 60 years of age falling in 30 per cent tax bracket will have to pay 1.62 per cent tax, resulting in post tax inflation adjusted return of – 2.27 per cent even at the highest FD rate of 5.4 per cent, while the post tax return would fall to -4.62 per cent on the lowest FD rate of 2.9 per cent.

So, unless the rate of inflation falls below the FD rates, any further rate cut by the RBI would have made the life of FD investors even more miserable.