Interest on deposit trumps inflation

December 10, 2016 00:00 AM Sagar Ghimire

Economists say that the rise in the deposit rates also discourages speculative investment in the stock market and real estate sector where the risks are higher. 

KATHMANDU, Dec 10: People losing on value for the last three years in real terms have now something to cheer as banks and financial institutions (BFIs) are now wooing them with as high as 9 percent interest rates on various fixed deposit schemes.

The slowdown in the deposit collection growth has compelled the banks and financial institutions to increase their interest rates to attract more deposits so that they can extend loans.

The fixed deposit rates have remained below 5 percent for nearly three years while inflation has been hovering above 8 percent, rendering the real value of the money deposited in banks or held in cash to fall. Now the deposit rate has reached 9 percent while the inflation has moderated to 6.7 percent, increasing the value of the money of saving by 2.3 percentage points.

"The rise in the fixed deposit rates after a long slump now exceeds the inflation rate. This means that the value of the money will grow in real terms," said Bhuvan Dahal, CEO of Sanima Bank Ltd.

While one-year fixed deposit rate plunged to as low as 3 percent in the last three years, the inflation hovered at around 8 percent, resulting in 5 percent of negative interest rate. The rate of interest depositors earn on savings must be higher than the rate of inflation, in order for the money to actually grow.

The rise in the fixed deposit rates has provided a relief to many risk-averse savers who did not have any investment opportunities for nearly three years due to ultra-low interest rates of the BFIs.

While those who have risk-taking capacity were reaping higher returns from the investment in the bullish stock market or booming real estate market, those reluctant make speculative investments satisfied themselves with low interests rates on bank deposits.
BFIs are now seeing a downturn in the deposit growth rate because there is little development expenditure which pumps money into the market, from where it flows into the banks. As of first quarter, the government has a surplus of Rs 54.61 billion in its account. Against the government plan to make Rs 311 billion in capital expenditure, the government has so far spent only Rs 20 billion as of Wednesday, which is 6.55 percent of the capital budget.

"If the government is able to spend, the money will flow into the banks. But, failure to spend has squeezed the deposit mobilization. Government failure to spend has been a kind of blessing in disguise for depositors," Dahal added.

Economists say that the rise in the deposit rates also discourages speculative investment in the stock market and real estate sector where the risks are higher. 

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