What’s the FD rate?

The price you pay a bank.
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Seeking protection in your journey.

Whenever it comes to money, we desire a high sense of security. Banks do this very well.

You can keep money in savings accounts for free

Now, add convenience to the mix.

Unlimited transactions across NEFT, UPI and withdrawals at ATMs

To top it off, banks arrest the feeling that you are not doing nothing with your money.

A feel-good 3.5% return on average cash held in savings accounts — you can even forego commitments for a few years to place fixed deposits and increase this to ~5–6%

These deposits also carry substantial government guarantees — it is hard to find other opportunities (leaving PPF and other government schemes) that provide similar safe and steady returns.

Return from investing in real estate and equity is neither safe nor steady. Lending to a third party — corporate bonds, debt mutual funds or even lending to a friend — and deposits with small banks come with steady but not safe returns.

It’s easy to see why bank deposits have universal appeal. They are the next best thing to doing nothing with your money.

But, like all developed economies, we expect interest rates and inflation to trend downward in India over the next few decades — the extreme case of prolonged high growth and high investment remains an outlier. Also, as governments and central banks try to keep real interest rates low to support businesses, we could see low return rates from savings (with low inflation).

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Since 1980, interest rates are going down. With limited changes to total factor productivity and capital per unit labour, it is hard to see any shift across a global phenomenon.

In all likelihood, we could see FD rates as low as ~1–2% in a decade, or even earlier.

Dependence on safe and steady can have a significant impact. Consider retirement — a 40-year-old, looking at a steady amount every month after 60, needs a ~20–25% higher retirement corpus. So, he/ she either needs to work a little longer or save more every month. Conversely, he/ she will have (even) lesser spending flexibility after retirement.

Imagine you take your cycle out for a brisk morning ride when it suddenly pours. You take out your umbrella, but it now has a gaping hole.

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The price you pay a bank is that gaping hole — a gap in future expectations because savings rates are tied to inflation. A safe and steady way to address this gap is to save more. Another way is to take on calculated risk.