Falling FD rates set to hit 4cr sr cit­i­zens hard

SBI Cuts Both Sav­ings And De­posit Rates

The Times of India (New Delhi edition) - - Front Page - [email protected] times­group.com

Mum­bai: Se­nior cit­i­zens and re­tirees who pri­mar­ily de­pend on in­come from fixed de­posits in banks, may soon need to look at shift­ing part of their life’s sav­ings into debt mu­tual funds.

On Wed­nes­day, along with a cut in lend­ing rates, bank­ing ma­jor State Bank of In­dia (SBI) also cut the FD rates for se­nior cit­i­zens for 1-2 years bracket to 6.9% from 7% while sav­ings bank rate was cut to 3.25% from 3.5% for de­posits of up to Rs 1lakh. Other banks are ex­pected to fol­low.

Thanks to the Re­serve Bank of In­dia (RBI), banks have moved to an ex­ter­nal bench­mark—the repo rate that is vari­able—to fix in­ter­est rates for their bor­row­ers. With the lend­ing rate be­ing marked to a vari­able rate, now it’s al­most a given that the rate of in­ter­est on de­posits will also be linked to the same vari­able bench­mark.

In a sce­nario where in­ter­est rates are de­clin­ing, when RBI cuts repo rate to spur growth, FD rates are bound to fall, hurt­ing those se­nior cit­i­zens and re­tirees de­pen­dent on FD in­come to meet their fi­nan­cial needs.

In such a sce­nario, say fi­nan­cial plan­ners, se­nior cit­i­zens will have to take some risks and in­vest in marked-to-mar­ket prod­ucts like debt funds. Al­ter­nately, the govern­ment has to step in to help se­nior cit­i­zens through tax con­ces­sions on the se­nior cit­i­zen sav­ings scheme (SCSS) in which up to Rs 15 lakh could be parked by each in­di­vid­ual of above 60 years, a re­port by SBI said.

Post SBI’s cut, yield on an FD of Rs 50 lakh trans­lates to a re­duc­tion in yearly in­come by Rs 5,000. SBI said that the rates have been cut ‘given the sur­plus liq­uid­ity in the sys­tem’.

Ac­cord­ing to an SBI re­port, it is es­ti­mated that cur­rently there are about 4.1 crore se­nior cit­i­zen FD ac­counts with about Rs 14 lakh crore in ag­gre­gate parked in them. All this money could be hit when these FDs are re­newed at a lower rate.

Speak­ing to TOI, Ra­jki­ran Rai, MD, Union Bank of In­dia, said: “His­tor­i­cally, in­fla­tion has been high at over 5%, which is why peo­ple are ac­cus­tomed to 8% on fixed de­posits. Now in­fla­tion is be­low 4% and de­posit rates are in the range of 6-7% which means that real in­ter­est rates have not moved much,” he said.

The move to sub-6% FD rates, how­ever, looks in­evitable. “Even­tu­ally, banks will have to move to a float­ing rate regime but in the short term the move will face a lot of re­sis­tance from de­pos­i­tors as they are not used to float­ing rate de­posits,” said Ga­jen­dra Kothari, man­ag­ing di­rec­tor & CEO, Etica Wealth Man­age­ment. When it comes to the need to main­tain the same life­style while in­come from FDs is falling, in­vestors could look at highly rated cor­po­rate FDs which are at least as good as the banks where the FDs were, said Surya Bha­tia, man­ag­ing part­ner, As­set Man­agers, a Delhi-based fi­nan­cial ad­vi­sory out­fit.

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