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Turning rate positive at last

business Updated: Sep 27, 2013 00:14 IST
Sachin Kumar

You may not have realised it, but the "safe" returns you were getting from your fixed deposits were eating into your savings and were actually making you poorer. Or, at best, they could have been protecting your capital without really giving you the returns you thought you were getting.

Here's how: the real interest rate, ie, what you get after factoring in rising prices, is the difference between the nominal rate of interest (what banks offer) and the rate of inflation. In recent months, that has hovered around the zero per cent mark and sometimes slid into negative territory (see graphic).

But soon, you can expect real interest rate to turn positive. Economists expect the Reserve Bank of India (RBI) to maintain or even increase the repo rate (on which banks peg their deposit and lending rates), which currently stands at 7.5%. This means there is little chance of long-tenure deposits falling below their prevailing 9.0-9.75% band.

"Banks will soon raise deposit rates to mobilise funds to meet the expected increase in loan demand in the coming festive season," said the retail banking head of a public sector bank.

Then, the effects of the good monsoon are likely to begin tempering food prices from the third quarter of the current financial year. This will have a knock on effect on inflation and can be expected bring the rate down. In any case, economists don't expect the inflation rate rise beyond the current level.

Then, there's another factor as well.

"We now expect the repo rate to be hiked by 0.50 percentage points to 8%," said Sonal Verma, economist, Nomura India. "As inflation expectations decline, rate cuts will likely follow, but there is very little visibility on cuts as of now," she said.

Monetary tightening will push FD rates higher. Several banks have already said that FD rates will rise following the 0.25 percentage point repo rate hike by RBI last Friday. Experts expect interest rates on FDs having maturities of one-to-three years to cross 10% soon.

"The Consumer Price Index-based inflation is expected to be in range of 9%-10% but it will not breach 10% mark," said Madan Sabnavis, chief economist, CARE Ratings. "Prices are likely to moderate on the back of good monsoon," he said.

That means you can stop worrying about inflation eating into your savings and start counting "real" accretions to your net worth.