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You may actually be 'dissaving' by putting money in savings instruments
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SME Times News Bureau | 16 Apr, 2021
You may not have noticed it but the actual interest rate that you are
getting on your bank deposits and investments in small savings schemes
has fallen into the negative territory.
This means that the
return on investments is not yielding any positive value but only
covering for higher inflation and savings may actually be falling in
their real value.
The situation has emerged in wake of a sharp
fall in deposit rates due to aggressive rate cuts by banks in response
to the Reserve Bank of India's (RBI) reduction in the benchmark rates,
coupled with a rise in consumer prices. What this meant is that the real
interest rate (actual return that you get on your savings minus
inflation) has been pulled into the negative territory, disincentivising
savings.
As per the latest RBI data, household financial
savings had declined sharply to 10.4 per cent of the nation's gross
domestic product (GDP) in the July-September period of FY21, down from
21 per cent of the GDP in Q1 of FY21. It is estimated to have further
declined in the December quarter as consumption intensified and options
to save were disincentivised.
A look at the official inflation
data based on wholesale price index (WPI) makes things clearer on the
trajectory for returns on savings. The data released on Thursday showed
WPI inflation accelerated to 7.4 per cent in March, higher than the
27-month high of 4.2 per cent in February. This is the highest inflation
rate recorded in the new data series. The previous high was 7.4 per
cent in October 2012.
Even if one looks at inflation based on
consumer price index (CPI), the trajectory has been going up and up.
After falling to 4.06 per cent in January, CPI inflation inched up to
5.03 per cent in February and further to 5.52 per cent in March 2021.
Food inflation also increased recently; however, the concern is the
elevated level of core inflation. Core inflation has not come down and
has remained above 5 per cent since June 2020 and touched 6 per cent in
March 2021.
If we compare the developments on inflation with the
rate of interest prevailing on prime savings instruments, the plight of
the common man becomes clearer.
Interest on five-year time
deposits is being maintained at 6.7 per cent in Q1 of FY22, the Senior
Citizen Savings Scheme is earning 7.4 per cent, PPF and NSC are offering
interest of 7.1 per cent and 6.8 per cent for the coming three months,
five-year recurring deposits is offering 5.8 per cent, and one-year to
three-year time deposits are fetching 5.5 per cent interest rate.
Similarly,
interest on five-year time deposits is being maintained at 6.7 per
cent, Kisan Vikas Patra is offering 6.9 per cent interest while the
Sukanya Samriddhi Account scheme is offering interest rate of of 7.6 per
cent. Not to mention savings deposits that is giving around 4 per cent.
In most of the savings instruments, the real rate of interest
has fallen sharply or fallen off the cliff into the negative territory,
barring the Sukanya Samriddhi Account scheme that is still offering some
positive returns after taking inflation into account.
The
situation would have been worse had the Finance Ministry not withdrawn a
decision to reduce interest rates in small savings instruments by upto
110 basis points from April. The rate of interest on these had already
fallen in April 2020 by about 140 basis points.
"Present,
interest rates will further pressurise savings which have been hit hard
by the Covid pandemic. However, if stricter lockdowns are imposed, then
the rate can go up temporarily again as it will be hard to spend
disposable income, but this is unlikely to repeat the extent of last
year shot up in savings rate as the lockdown stringency levels are
easier than last time," said Madhavi Arora, Lead Economist, Emkay Global
Financial Services.
According to a research report from
Brickwork Ratings, CPI inflation is expected to remain close to the
upper bound target of 6 per cent in Q1 FY22. "Despite the favourable
base effect, the recent restrictions to contain the virus spread and
relatively higher oil prices coupled with surplus liquidity created by
the OMO of Rs 3.13 trillion in the last fiscal, and increase in money
supply arising from foreign exchange management, can pose upward risks
to inflation," the report said.
This would mean while the RBI
may maintain its accommodative stance while keeping policy rate
unchanged at next monetary policy committee meeting next month, common
people will continue to suffer erosion of their wealth with savings
fetching negative or no real returns.
"Low interest rates are
critical for the economic revival of the country. Meanwhile, inflation
also needs to remain within a specific target," Pranjal Kamra, Founder
and CEO, Finology, had said earlier.
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Customs Exchange Rates |
Currency |
Import |
Export |
US Dollar
|
66.20
|
64.50 |
UK Pound
|
87.50
|
84.65 |
Euro
|
78.25
|
75.65 |
Japanese
Yen |
58.85 |
56.85 |
As on 13 Aug, 2022 |
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