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Invested most of your money in FDs? There is BAD news for you - Know why

Last week, RBI said that the Consumer Price Index (CPI)-based inflation is now projected to be at 5.3 per cent for 2021-22 with risks evenly balanced.

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With retail inflation exceeding the interest rates, there is some bad news for depending upon income from bank fixed deposit (FD) schemes, including senior citizens. Last week, the Reserve Bank of India (RBI) said that the Consumer Price Index (CPI)-based inflation is now projected to be at 5.3 per cent for 2021-22 with risks evenly balanced.

This means the real interest rate would be (-) 0.3 per cent for the saver with the State Bank of India (SBI).

What is real interest rate?

The real rate of interest is the card rate minus the inflation rate. The retail inflation for August stood at 5.3 per cent.

Even for higher tenure 2-3 years, the interest rate earned is 5.10 per cent lower than expected inflation for the current financial year.

In the private sector, HDFC Bank offers 4.90 per cent interest rate for 1-2 year fixed deposits while 5.15 per cent for 2-3 years. However, small savings schemes run by the government offers better return compared to fixed deposit rates of banks. For term deposits 1-3 years, the interest rate offered is 5.5 per cent higher than the inflation target, according to a PTI report. There is a natural advantage of moving money from bank FD to government saving schemes as rates are slightly higher. Thus, the real rate of interest is in the positive territory.

However, experts said that it is a usual phenomenon that real returns are negative in a crisis and post-recovery world, given the way fiscal stimulus to overcome difficulty.

The phenomenon is the same world over and India is no exception.

(With agency inputs)

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