The Impact of Inflation on Fixed Deposits

Posted on Friday, February 2nd, 2024 | By IndusInd Bank

Inflation is an inevitable reality, reflecting the gradual increase in prices over time. In 2023, this trend was evident in India, where the inflation rate fluctuated around 5.5%. This increase affects various aspects of life, such as daily expenses, housing costs, education fees, healthcare, and travel. In this mix of impacts, investments such as fixed deposits get affected too. 

Fixed deposits are bank offerings that promise consistent returns. They are well-known for their stability and predictability, qualities that attract many savers. However, this steady nature of fixed deposits also makes them vulnerable to the impact of inflation. 

So, How Does Inflation Impact Fixed Deposits?

When you open a fixed deposit account with any bank, you are promised a fixed interest rate. Suppose the rate is 4% per annum. This seems like a good return. However, if inflation rates are high, they can erode the real value of your returns. Let’s say inflation is 6%. Your FD returns become negative in real terms. You earn 4% from the deposit but lose 6% due to inflation. Thus, the actual value of your money declines.

Moreover, high inflation may prompt RBI to increase interest rates as a measure to control excessive spending, curb inflationary pressures, and maintain economic stability. 

This situation can be unfavourable for existing FD holders. New deposits might offer higher interest rates, making older, lower-yielding deposits less attractive. Depositors with long-term FDs might find themselves locked into rates that are below the current market rate. If they withdraw their money before the maturity date, they may have to pay a penalty. This limitation can be problematic if they need funds to withdraw and invest in higher-yielding options. 

Ways to Maximise Returns on Your FDs

While fixed deposits offer safety and guaranteed returns, they might not keep up with inflation. This mismatch is a huge risk for those who rely heavily on FDs for income, such as retirees. So, what should you do? Here are some steps you can take:

1.Choose an FD with higher interest rates

The interest rate is the most important consideration in outpacing inflation. You can consider IndusInd Bank Fixed Deposits to enjoy high interest rates on FD schemes. Simply book your FD online through your PAN and Aadhaar details. Complete your KYC instantly with the Video-KYC facility and choose a flexible amount and tenure. 

2. Ladder your FDs

FD laddering means splitting your investment into multiple fixed deposits with different maturity dates. For instance, instead of investing a lump sum in a single 5-year FD, you can stagger investments across different maturities like 1 year, 2 years, and 3 years. When one deposit matures, you can reinvest it to keep the ladder going.

FD laddering offers benefits like diversification, access to liquidity, the opportunity for increased returns, and flexibility to adapt to changing interest rates. 

3. Invest in tax-saving fixed deposits

Tax saver FDs qualify for tax deductions under Section 80C of the Income Tax Act. These deposits, with a lock-in period of five years, can help reduce your taxable income. Although the interest earned is taxable, the tax benefit on the principal amount makes this a wise choice for many, especially those in higher tax brackets.

4. Utilise senior citizen benefits

Senior citizens typically receive higher interest rates on fixed deposits. These rates are usually 0.25% to 0.50% higher than the regular rates, which can add up to a significant amount over time. If you are a senior citizen (above 60 years) or are investing on behalf of one, make sure to take advantage of high FD interest rates and other additional perks designed specifically for this age group.

Choose IndusInd Bank for Your FD Investments 

While fixed deposits offer safety and predictability, inflation is a threat to their real value. Thus, you need to adopt smart strategies and practical choices to combat inflation and maximise your FD returns. Choosing Indusind Bank can be a wise move here as you will receive several benefits like: 

• High FD rates and exclusive perks for seniors
• Easy online booking through video KYC
• Diverse tenure options
• Auto-renewal at maturity 
• Regular interest payment options
• 5-year tax saver FD option, and more.

So, secure your hard-earned money with IndusInd Bank Fixed Deposits – Apply today!

Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.