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Turn to small savings to earn real returns

BS Banking Bureau in Mumbai | January 27, 2004 12:59 IST

If you want to earn "real" returns on your savings, get out of the banking system and turn to small savings.

With the wholesale price index-based inflation rising to a new high of 6.21 per cent in the week ended January 10, the return on all bank deposits has turned negative. In contrast, the yields on small savings are still higher than the current inflation rate.

Most of the commercial banks are now offering a maximum interest rate between 5.25 and 5.5 per cent on deposits of two years and above.

Even cooperative banks are offering around 6 per cent for long-term deposits.

Though the savings bank deposit rate is pegged at 3.5 per cent, most of the banks are offering less than this for short-term 15-45 day deposits.

However, the yields on small savings are still higher than the current inflation rate. Most of the post office savings schemes offer an annualised return of 9 per cent or better.

The return on the public provident fund and taxable RBI Relief Bond is 8 per cent. The tax-free Relief Bond offers 6.5 per cent.

"The high rate of inflation may continue for some time and the Reserve Bank of India's year-end inflation target of 4-4.5 per cent may be an under estimate," said an analyst.

Analysts feel the year-end inflation rate will certainly be closer to 5 per cent.

"We will not be surprised if the inflation rate goes beyond 5 per cent. That's possible if the international oil price rise further," the analyst pointed out.

In the medium to long term, however, inflationary expectations are not very high. To that extent, the savers need not worry, said a banker.

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