The Death of FDs!!!

For decades, fixed deposit instruments were considered the most preferred financial instrument for savings purpose for our grandparents and the older generations. In the mid-90s era the FD rates were a whopping 12% while when we moved to 2008-09 it was 8.38% and now it has dipped down to 6.5%

This is the worst time to invest in FDs. Their interest rates are at a multi-year low. The nationalized banks and other private banks are offering FD rates in the range of 6% to 7.2% per annum, depending on your tenure, and a touch 0.5% higher for senior citizens.

On the other side, the CPI (a macroeconomic indicator of inflation) inflation for May’24 was at 4.8% approximately. This means that you are losing your purchasing power by investing in Fixed Deposits with the effect of inflation too.

Let us understand this through an example. Assume you invest ₹ 10,000 for a year at the rate of 6.8% with a nationalized bank it will yield ₹ 10,680. But with the inflation coming into picture your real rate of return would be ((1+r)/(1+i)) – 1 = 1.908% which when multiplied by ₹ 10,000 will give you only ₹ 10,190.80.

This means that inflation ate away your additional return i.e., 680 interest earned through the bank minus inflation of 4.8% resulting in a loss of (₹ 680 – ₹ 190.80) = ₹ 489.20.

You should also note that the interest earned on a fixed deposit investment is subject to tax deducted at the source. Now, tell me with such a low yield product would you still want to invest in the FD product, or should you move to some other financial products which offers you better returns?

Now the next time when you think about FD think what you are doing with your idle money.