You may not have noticed it but the actual interest rate that you are getting on your Savings Account and investments in small savings schemes has fallen into the negative territory. This means that the return on investments is not yielding any positive value but only covering for higher inflation and savings may actually be falling in their real value. The situation has emerged in wake of a sharp fall in deposit rates due to aggressive rate cuts by banks in response to the RBI’s reduction in the benchmark rates, coupled with a rise in consumer prices.
A look at the official inflation data based on the wholesale price index (WPI) makes things clearer on the trajectory for returns on savings. The data released recently showed WPI inflation accelerated to 7.4 percent in March, higher than the 27-month high of 4.2 percent in February. This is the highest inflation rate recorded in the new data series. The previous high was 7.4 per cent in October 2012.
Even if one looks at inflation based on the consumer price index (CPI), the trajectory has been going up and up. After falling to 4.06 percent in January, CPI inflation inched up to 5.03 percent in February and further to 5.52 percent in March 2021. Food inflation also increased recently; however, the concern is the elevated level of core inflation. Core inflation has not come down and has remained above 5 percent since June 2020 and touched 6 percent in March 2021.
Interest on five-year time deposits is being maintained at 6.7 percent in Q1 of FY22, the Senior Citizen Savings Scheme is earning 7.4 per cent, PPF and NSC are offering interest of 7.1 percent and 6.8 per cent for the coming three months, five-year recurring deposits are offering 5.8 percent, and one-year to three-year time deposits are fetching 5.5 percent interest rate. Similarly, Kisan Vikas Patra is offering 6.9 percent interest while the Sukanya Samriddhi Account scheme is offering an interest rate of 7.6 percent. Not to mention savings deposits that are giving around 4 percent.
This would mean while the RBI may maintain its accommodative stance while keeping policy rate unchanged at next monetary policy committee meeting next month, common people will continue to suffer erosion of their wealth with savings fetching negative or no real returns.
“Low-interest rates are critical for the economic revival of the country. Meanwhile, inflation also needs to remain within a specific target,” Pranjal Kamra, Founder and CEO, Finology, had said earlier.
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Disadvantages of Keeping Too Much Money In Your Savings Account
- Low-Interest Rates: Interest rates are lower compared to other types of accounts or investments, such as money market accounts or certificate of deposits (CD).
- Rates can change: Savings account interest rates are variable, meaning that financial institutions are free to set and change interest rates as they wish. High-interest savings account rates will stay largely in line with the movements of the federal rate.
- Inflation: If your savings account doesn’t pay a competitive interest rate, inflation could be eating up the value of your earned interest, leaving you with an account balance that’s worth less a year from now than it is in today’s dollars.
- Compounded Interest: Most traditional banks or credit unions compound your savings account interest monthly, or even annually. This means the full potential of your money isn’t always realized, especially when compared to other investment opportunities.
Here are a few things you can do
- Start your SIP/ Recurring deposit 2-3 days after your salary date for your financial goals.
- Keep a minimal amount in your saving bank account (unless is needed in the next few days).
- Open a Liquid mutual fund folio, just to transfer the extra cash, and whenever you need it, you can redeem it and get the money in 24 hours.
- Don’t keep more than 6 months of expenses in your liquid mutual fund.
- Do your financial goals planning and be aware of the future targets to achieve, it will help to know if you are lagging behind in reaching your financial goals.