Inflation to hit FDs

Bank depositors, who have locked in money for tenure of less than one year, could be the major losers and earn negative interest rate on their fixed deposits if high inflation persists over a longer time. A study of interest rates, offered by different public sector banks, revealed that all of them are currently offering six 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 nine 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 observed.