Why Might You Be Getting a Negative Interest Rate On Your Fixed Deposit?

Why Might You Be Getting a Negative Interest Rate On Your Fixed Deposit?

If you’re having extra amounts of money stored in a fixed deposit or if you’re looking to start an Fixed Deposit, wait! Because we have news for you.

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For the past year, anyone who has invested in Fixed Deposit then you might not be liable to get any interest promised by the bank at the time of fixation of the same.

Negative return in fixed deposit

You ask why, right?

Well! The answer would take us to the very basics of accounting or economics class. It lies in the basic formula for the calculation of the interest returns for a fixed deposit.

Now, you see, in the case of an FD, you get back real interest rates which are calculated by subtracting the inflation rate from the nominal interest rates.

The nominal interest rate is the promised rate of return, and the rate of inflation is the rate at which the prices of goods and services rise in a country and directly affect its people’s lifestyle.

Now, the highest nominal rate provided by some of the most extensive banking institutions in the country, such as SBI, HDFC, ICCI, ranges from 5 to 5.3 percent for a 3 to 5 years term.

Also Read- Best time to invest in a Fixed deposit is now, Check Now

But since we’ve stuck with the pandemic starting from the March of 2020 and its aftereffect were in effect after 2-3 months from that time, we’ve seen an enormous spike in the inflation rate as well.

And under a particular condition such as a pandemic where we might head towards deflation. The central bank gets a right to take interest rates from the commercial banks for parked money, such as FD.

The commercial banks are then discoured to hold money and are forced to liquidate the same, resulting in a boosted economy. This is why they shift to giving the lender (The one with the FD in the bank) a negative interest rate.

Now, the average inflation rate for 2020 was 6.2 percent compared to the previous year. This means that the real rate of return for FD if we’re considering the ideal situation would turn up to be around -0.9 percent.

This eventually means that you would not have had any interest generated for your Fixed Deposit for the last year, and it would continue being this way until we’re out of the aftereffects of the pandemic.

Do you find this information of any good use? Well! If you do, then do tell us in the comments about your opinion on the same.