Bank deposits set to give negative return
Business Standard, December 18, 2009, Section II, Page 1
Manojit Saha & Neha Pandey / Mumbai December 18, 2009, 0:30 IST
With inflation on the rise and projected to rise further, the real return on your fixed deposits could soon turn negative.
At present, most banks offer 6-6.5 per cent interest on one-year deposits, which is the lowest in recent times. Headline inflation, based on the wholesale price index, touched a 10-month high of 4.78 per cent in November.
In a report, ICICI Securities said inflation could average 7 per cent this year, while Citi said it could cross 6 per cent by the end of the month to hover above 8 per cent by March.
With 70 per cent of the recent deposit flow concentrated in the one-year bucket, a host of retail depositors could be staring at a situation when they begin to lose money in real terms by the end of the month. Bankers said that with rates expected to rise over the next few months, depositors were unwilling to lock in their deposits for longer tenures.
In this scenario, bankers said they faced a Catch 22 situation due to their inability to raise lending rates to make up for the loss in margin due to an increase in deposit rate.
“If deposit rates are to be increased, the cost of funds will go up. The problem is that credit is not picking up, and if you increase lending rates credit pickup will be further affected,” said an executive director of a large public sector bank. Loan growth in the year to December 4 was estimated at 10.5 per cent, the lowest in more than decade.
Though some banks may increase rates on longer-term maturity deposits, mainly to narrow the gap between their assets and liabilities, it will be difficult for them to increase one-year deposit rates.
Over the last 12 months banks have lowered deposit rates from 8.75-10.50 per cent to 6-7.50 per cent now to realign costs. The reduction was the outcome of several rounds of reduction in key policy rates and enhancement of liquidity in the banking system.
Business Standard, December 18, 2009, Section II, Page 1
Manojit Saha & Neha Pandey / Mumbai December 18, 2009, 0:30 IST
With inflation on the rise and projected to rise further, the real return on your fixed deposits could soon turn negative.
At present, most banks offer 6-6.5 per cent interest on one-year deposits, which is the lowest in recent times. Headline inflation, based on the wholesale price index, touched a 10-month high of 4.78 per cent in November.
In a report, ICICI Securities said inflation could average 7 per cent this year, while Citi said it could cross 6 per cent by the end of the month to hover above 8 per cent by March.
With 70 per cent of the recent deposit flow concentrated in the one-year bucket, a host of retail depositors could be staring at a situation when they begin to lose money in real terms by the end of the month. Bankers said that with rates expected to rise over the next few months, depositors were unwilling to lock in their deposits for longer tenures.
In this scenario, bankers said they faced a Catch 22 situation due to their inability to raise lending rates to make up for the loss in margin due to an increase in deposit rate.
“If deposit rates are to be increased, the cost of funds will go up. The problem is that credit is not picking up, and if you increase lending rates credit pickup will be further affected,” said an executive director of a large public sector bank. Loan growth in the year to December 4 was estimated at 10.5 per cent, the lowest in more than decade.
Though some banks may increase rates on longer-term maturity deposits, mainly to narrow the gap between their assets and liabilities, it will be difficult for them to increase one-year deposit rates.
Over the last 12 months banks have lowered deposit rates from 8.75-10.50 per cent to 6-7.50 per cent now to realign costs. The reduction was the outcome of several rounds of reduction in key policy rates and enhancement of liquidity in the banking system.
Investment advisors said depositors should realign their risk portfolio and opt for hybrid products, such as, monthly income plans. “As they have a cap on equity exposure, your investment will be more towards the less-risky fixed income funds,” said Hemant Rustagi, CEO of Wiseinvest advisors. Alternatively, he said, since rates were likely to move up, investors should opt for short-term debt funds with tenures of six to 12 months.
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