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MUMBAI : Millions of depositors are faced with negative returns on their term deposits in commercial banks, with the Reserve Bank of India (RBI) keeping interest rates at historic low levels and inflation expected to hover around 5%.

After two months of positive but near-zero returns in December and January, the inflation-adjusted return stood at -0.03% in February for such deposits, considered one of the most popular modes of savings for most Indians, showed data compiled by Mint.

Since inflation is expected to hover around 5% till September, hopes of a sizable positive return from bank deposits in the near term will solely depend on lenders’ willingness to raise deposit rates, experts said.

According to RBI’s projections, retail inflation is expected at 5-5.2% in the fiscal first half. Moreover, while banks such as Canara Bank and State Bank of India (SBI) have raised deposit rates in some segments, the steps have been largely sporadic.

While household financial savings typically refer to currency, bank deposits, debt securities, mutual funds, pension funds, insurance and investments in small savings schemes, it is heavily skewed in favour of bank deposits. “It is difficult for savers to make money from fixed deposits at the moment as inflation remains above the interest rate," said Pankaj Bansal, chief business development officer at Bankbazaar.com, a financial services marketplace. To overcome this, Bansal suggested consumers could consider instruments such as equity-linked savings schemes (ELSS) as the stock markets are currently buoyant.

Another option would be to look at some smaller banks that are offering high deposit rates, he said. For instance, Suryoday Small Finance Bank pays 6.75% in the one- to two-year bucket, whereas India’s largest private lender, HDFC Bank, pays 4.9% in the same period.

As part of its inflation-targeting mechanism, the government has retained RBI’s flexible inflation target in the 2-6% band for the five years through 31 March 2026. Experts maintain that if inflation remains at elevated levels for a longer duration, the erosion in returns would be greater unless the banks raise deposit rates.

“Inflation will remain high, and banks need to raise deposit rates to give more attractive returns to savers," said Madan Sabnavis, chief economist, Care Ratings. Sabnavis argued that in FY22, both banks and non-bank lenders will require funds from depositors to cater to an expected rise in credit demand from large borrowers.

“Banks that are looking for funding will try and increase deposit rates. Our call is that inflation will be at 5-5.5% in FY22, and the problem now is that core inflation is going up," added Sabnavis.

Meanwhile, bank deposits continue to see a steady flow despite diminishing returns. As of 26 February, bank deposits stood at 149.3 trillion, a 12% rise from a year ago. However, people have now started to spend, as evident in the decline in the household savings rate and increase in indebtedness from June to September.

According to experts, there are chances of an increase in deposit rates this fiscal, considering RBI is cautiously trying to wean the economy off this liquidity glut as seen from the amount of excess liquidity falling to 3-4 trillion currently from more than 6 trillion earlier.

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