High inflation, rising gold prices and a recovery in the stock market took the sheen out of bank deposits that saw stagnant growth in the first nine months of 2012, even as banks offered high interest rates on fixed deposits.
Total deposits (including savings, current and fixed deposits) with commercial banks in India grew by 13% to Rs. 1,663,300 crore at the end of September 2012 according to the Reserve Bank of India data.
This was no more than a similar 13% growth rate at Rs. 1,481,170 crore at the end of September 2011 against R1,311,860 crore at the end of January 2011.
Wholesale price index-based inflation, which has been hovering around 8% in 2012, has made bank deposits less attractive, say experts.
"High inflation has made bank fixed deposits less attractive for investors," said Vishal Dhawan, founder, Plan Ahead Wealth Advisors. "Whenever inflation is high, investors move towards assets such as gold and real estate, which beat inflation."
Gold rose from R27,322 per 10 grams on January 2, 2012 to R31,223 at the end of September, registering a growth of approximately 15%.
Banks are offering up to 9.5% interest on fixed deposits and 4% on savings deposits (except some mid-sized banks that offer better rates).
Driven by strong inflow from foreign institutional investors (FIIs), the benchmark Sensex of the Bombay Stock Exchange (BSE) rose 21% in the first nine months of 2012. The index started 2011 at 15,517 points and ended at 18,763 on September 28, showing a gain of 3,245 points.
“Many investors were attracted to the stock market this year because of its better performance,” said a senior executive of a public sector bank. “When inflation is high, individuals tend to pre-pay home loans by taking money out of their savings.”
Apart from EMIs (equated monthly instalments) taking away savings funds, higher interest rates in corporate bonds, or mutual funds that have underlying bonds, also make bank deposits less attractive.