The real interest rate reached 4.2% in India, the highest rate among emerging markets. Is it the best time to opt for term deposits?

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New Delhi: Banks in India offer up to 8% interest rate on a one-year fixed deposit. Since inflation in the country has remained benign for a considerable period of time, the real interest rate – the real interest rate minus inflation – has increased.

According to a report published in the Economic periodIndia’s real interest rate touched 4.2%, the highest reading among major emerging markets. In other emerging markets such as Mexico, Indonesia, Russia, South Africa and China, real interest rates fluctuate between 0.9 and 3.9%, HEY says the report.

Analysts believe that such a high real interest rate is unlikely to hold in the near future as it will discourage consumption and be negative for the economy.

It should be mentioned here that the real interest rate of 4.2% is 280 basis points above the RBI’s comfort zone, suggesting that the RBI could either cut the repo rate when its next policy meeting in April, or expect inflation to rise in the near future. Prithviraj Srinivas, economist at Axis Capital, said HEY the gap between the real interest rate and the RBI’s comfortable zone shows that the market believes that current inflation is likely to rise to 4-4.5% over the next 12 months.

Either way, real interest rates are unlikely to hold at those levels, analysts said, suggesting savers should lock in those high FD rates available in the market.

One of the reasons why banks are currently giving higher interest rates on FD is that deposits are not growing at the same rate as loans. Banks will cut interest rates on FDs as soon as deposit growth picks up. And historical evidence suggests that each time the real interest rate reached levels of 4.2%, financial savings increased. It is therefore advisable to lock in the prevailing high interest rates on FDs.

Earlier this week, Reserve Bank Governor Shaktikanta Das said he would meet with leaders of public and private sector banks to discuss passing on lower interest rates to borrowers. The RBI cut the benchmark interest rate by 0.25% to 6.25% earlier this month. It should be mentioned here that banks have already indicated that they cannot cut lending rates unless the MCLR, which is tied to deposit rates, goes down.

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