Inflation will drive Fixed Deposit Returns in the Coming Future

 

Inflation will drive Fixed Deposit returns in the Coming Future

Right now the average annual inflation in India is 10-12% per annum while the Bank Fixed Deposits are earning just 7-8% annually and PPF and GOI Bonds are earning just 8.5% returns per annum.

So theoretically speaking, Bank FDs, PPF & GOI Bonds are safe investments but in reality they are not particularly right now. Because the inflation is higher than the returns offered by these fixed income instruments.

So actually right now you are losing money on your fixed income instruments. In fact, you are earning –2.5-4% (Negative) returns on your PPF & GOI Bonds right now.

It means that your wealth in these fixed income instruments is right now shrinking even though you think that it is growing at the safe rate. Your wealth is shrinking in the terms of the purchasing power.

And that’s why I personally feel that very soon, the banks and government will raise the interest rates on these fixed income instruments (And if not than they should..!!!).

Ideally the returns from Fixed income instruments should be 2% higher than the rate of inflation. So ideally right now in India the returns from Bank FDs should be 12-14% (As the inflation is 10-12% per annum) per annum.

Government should seriously raise its key interest rates. Otherwise, people who are living on fixed income instruments or planning to live on fixed income instruments after their retirements will suffer. Their retirement won’t be peaceful financially.