Retirees will need to look beyond FDs

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A negative real return could mean that senior citizens might outlive their savings
Banks have been reducing interest rates following a series of repo rate cuts by RBI to support economic growth



NEW DELHI : Senior citizens living on fixed deposits and similar products are squeezed between rising prices that increase their cost of living and falling interest rates that reduce their income.

Official data released on Thursday showed that consumer price index (CPI) based inflation for July was at 6.93%, much above the Reserve Bank of India’s tolerance limit of 6%, at a time the central bank has been reducing policy rates to boost consumption and spur an economic revival.



The gap between interest rate and inflation has closed or reduced for most traditional fixed income products, leading to negative real returns. The real rate of return is the return from an instrument minus inflation. A negative real rate of return may lead to erosion in the corpus since the return generated is lower than the rise in cost of living. For retirees, this could mean they might outlive their savings, as their expenses remain higher than their income.

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Banks have been reducing interest rates for some time now, following a series of repo rate cuts by the RBI to support economic growth. Repo rates have gone down from 6.50% in February 2019 to 4% now. Retail inflation touched a high of 7.35% in December 2019 and has remained above 6% since then, except in March 2020. So, the real rate of return from investment in a senior citizen’s five-year fixed deposit ‘Wecare’ (special FD introduced by SBI for senior citizens) offering a 6.20% interest, will be minus 73 basis points, considering the July inflation rate of 6.93%. One basis point is one-hundredth of a percentage point.

However, this accounts merely for inflation; factor in taxes and the real return falls further. For a person in the highest tax bracket of 30%, the post-tax return will be 4.34%; that is, a real rate of return of -2.59%.



Experts said the real rate of return will remain negative on these products for some time.

“To rely solely on bank fixed deposits to give them a real rate of return is no longer a valid assumption,” said Mahendra Jajoo, chief investment officer – fixed income at Mirae Asset Investment Managers (India) Pvt. Ltd.

“They should look at other fixed-income products like debt funds which have been able to deliver inflation-beating return,” Jajoo added.

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