Is your bank FD beating inflation? Here's what experts think

Following the rise in repo rates by the Reserve Bank of India (RBI), the home loan interest rates have started to move up. As expected, a few banks have also already announced increase in the interest rates for fixed deposits in tune with the rise in key benchmark rate of the central bank. For example: State Bank of India (SBI) hiked fixed deposit (FD) interest rates to 5.30 per cent from 5.10 per cent on deposits of 1 year to less than 2 years, jump of 20 basis points. Similarly, private sector lender HDFC Bank has also increased FD rates on various tenors of less than Rs 2 crore by up to 25 basis points. A basis point is one hundredth of a percentage point.

The question, however, remains whether this recent increase in FD rates will be enough to absorb the impact of high inflation, which was as high as 7.04 per cent in May 2022, and is likely to breach the 8 per cent mark in the coming months on the back of supply constraints and high crude oil prices. 

“Currently the environment is not conducive for savers, because we have high inflation and even after recent increase in FD rates it is not sufficient. If one is not comfortable taking more risk than one must stick to fixed deposits and other fixed return instruments. But if you are concerned about inflation eating away the returns on your investments, then you can consider investing in a mix of equity, gold and debt mutual funds to earn better returns,” says Rishad Manekia, founder and MD, Kairos Capital.

Here are the FD rates offered by various banks against the high inflation rate of 7 per cent in the country: 

Clearly, given the high inflation the real rate of interest on your fixed deposit has turned negative, with only around 5.3 per cent annual interest on your fixed deposits against the inflation rate of 7.04 per cent.  However, compared to public and private sector banks, small finance banks offer high interest rates around 6.30 -7.25 per cent. Look at table below:

Should one invest in small finance banks to get better returns? “While some of the small finance banks offer better returns on the FDs, but you must consider if the yield that is being paid out compensates adequately for the risk. In other words, an investor must ask themselves if the yield being paid out by the small finance banks fixed deposit justifies the extra credit risk,” says Manekia.