Your Money: Real return: What it hides and reveals

During Covid times, savers were in a tight spot. Interest rates were low while inflation was high. Due to the fear psychosis, people were saving for uncertain times. Real interest rates, as measured by apparent interest rate over inflation, was negative.

From those days, things have improved significantly. SBI deposit rate for two years, non-senior citizen, is currently 7%. CPI inflation for April 2023 is 4.7%. On a very ballpark basis, real interest rate, taking the deposit rate at the leading bank, is positive 2.3%. As per formula, it is (1 + 7%) / (1+4.7%) – 1 = 2.2%. Bank interest rates are not coming down now, rather may move up a little .

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Inflation and deposit rates

RBI projection for CPI inflation in the financial year 2023-24 is 5.2%. Even if it is off a bit, real interest rates will remain positive now. Given this scenario, savers / depositors are in a happy situation. However, it needs to be understood in context.

During Covid times, bank deposit rates were low, let us say 5% for the sake of discussion. Inflation was high, let us say 6%. The 5% deposit rate is for fresh deposits made on that day. However, you may have deposits made earlier, before RBI rate cuts, at say 7%. That continues to earn 7%. The inflation data point, 6% in our example, is inflation over the past one year. Inflation over the next one year, or other time periods for which you are making the deposit, is unknown. Hence it is at best a very ballpark comparison, not a cogent basis.

On the applicability of data, it is about the relevance of inflation. There is one measure of inflation across the country. However, everybody’s consumption basket is different. When the government data says CPI inflation is 4.7%, actual inflation for your basket of goods and services could be 6.7% or 3.7%. Hence, this comparison for measurement of real interest rates should not be given undue importance. Then comes taxation. Interest on bank deposits is taxable at your marginal slab rate. Net-of-tax comparison of interest with inflation is a different equation.


It is a widespread practice to form a perspective on real returns, based on current deposit rates and latest inflation data. If you were feeling sad earlier by using this measure, you can feel happy by the same logic. The bigger argument is about the purpose of what you are doing. If the savings are being made for rainy days, you have to go ahead with it, irrespective of real returns. Financial security is the bigger need.

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Then comes the question, how to earn real positive returns. There are investments that yield inflation-beating returns over an adequate holding period, e.g. equity stocks / funds. However, your investment allocation is a function of your risk profile, investment horizon, objectives, etc. It is advisable to consult a financial advisor / planner for devising your investment allocation. Doing appropriate investments is important; real positive returns are the outcome.

The writer is a corporate trainer and an author

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