A study of interest rates, offered by different public sector banks, revealed that all of them are currently offering 6 per cent to 7.50 per cent interest on deposits for duration of six months to one year. Whereas, inflation has spiralled to 7.61 per cent as of April 26.
If this trend persists and deposit rates are not revised, bank deposits would start or are already earning negative interest rate (rate of inflation being higher than the rate of interest) since the last few weeks. Logically, interest rate on FDs need to be higher than inflation, which helps depositors earn real interest rate or at least beat inflation.
The interest rates offered by banks for term deposits of more than one year are, however, between 8.25 per cent and 8.75 per cent and in some cases even 9 per cent and thus depositors are well protected from inflation.
Ajit Ranade, Group Chief Economist, Aditya Birla Management Corporation said it is true the bank depositors will get negative interest rate if the rate of inflation is higher than the rate of interest. However, he pointed out the inflation is a weekly number. One needs to consider the average rate of inflation over a period of time, he said.
S K Goel, chairman and managing director of UCO Bank, argued that the interest rates offered by banks at present are taking care of higher inflation.
"The inflation has gone up only during the last few weeks. You are to consider average rate of inflation and compare it with duration of deposits," he said.
M D Mallya, CMD of Bank of Baroda, said, "Inflation will moderate soon with the government and the Reserve Bank taking several measures. He pointed out banks decide on rate of interest after considering their cost of funds, the liquidity in the system and the signals given by the Reserve Bank."
Rupa Rege Nitsure, chief economist, Bank of Baroda, said, "Ideally, interest on bank deposits should be higher than actual and expected rate of inflation."
She said it was a rare phenomenon that the rate of inflation is higher than the interest rate of bank deposits. Though, she also pointed out it has happened in the past as well.
Interaction with bank depositors revealed that most of them do not factor in the rate inflation when they put their money in short term deposits like 15 days or 30 days or three months.
More than individuals, corporates go for short term deposits. In those cases, the idea is only to park the fund for a temporary period. However, for a longer period of deposit of six months to one year to three years, people would of course like to earn interest rate which will be higher than the rate of inflation.
If the interest rate is negative - when inflation is more than the interest rate - people will be better off spending their money rather than invest in bank FDs and see erosion in its value, they pointed out.
