by Joydeep Sen , ET, 16.2.11.
In a scenario of high inflation rates, there is a question on deposits placed with banks (or other fixed income oriented products) — are the returns real, i.e. adjusted for inflation? Does it give positive returns at the end of the tenure? Though inflation, in a way, is a tax on investments, it is not under the investor’s control....
In a scenario of high inflation rates, there is a question on deposits placed with banks (or other fixed income oriented products) — are the returns real, i.e. adjusted for inflation? Does it give positive returns at the end of the tenure? Though inflation, in a way, is a tax on investments, it is not under the investor’s control....
We have analysed deposit — return data for the past 11 years, taking the deposit rate at the beginning of the year and comparing it with inflation for the year. We have taken the 1-year deposit rate as per RBI Weekly Statistical Supplement (WSS) and CPI-IW as proxy for inflation.
As per this analysis, real return was positive in 7 out of these 11 years and negative in 4 years.
The negative return years are 2006, 2008, 2009 and 2010, i.e. in 4 out of the past 5 years. While bank deposit rates were, on an average, higher than the previous 5 years (i.e. 2001 to 2005), it has not kept pace with higher inflation.
In the earlier years, M3 was on the lower side; from 2001 to 2005, on an average, it was Rs 19.4 lakh crore whereas from 2006 to 2010, it averaged Rs 45.2 lakh crore.
Higher M3 implies a higher pool size for bank deposits. Banks increased deposit rates from 2007 to 2009, even though M3 was moving up. Banking system liquidity was on the lower side except for 2009. When liquidity available with banks at the margin is on the lower side, banks would increase deposit rates.
At the end of the day, depositors should not be guided too much by whether returns are real or not. There is lack of relevant data: the composition of the inflation measurement basket is different from the profile of the people who would have surplus money to deposit in banks.
The wholesale price index (WPI) basket consists of 65% manufactured products, 20% primary articles and 15% fuel-power.
The CPI-IW basket consists of 46% food articles, 15% housing and 23% ‘miscellaneous’.
There is no representation of services in the inflation measurement baskets whereas services comprise more than half of our GDP.
Even for matching items, the weightage in the basket would be different from the consumption pattern of the depositor. Net-net, the measurement of whether the returns are real at the end of the tenure of the deposit, is subjective in the absence of a precise inflation measurement basket matching the consumption basket of the depositor.
Hence, the saver should be guided more by the principle of saving for a rainy day.
No comments:
Post a Comment