Needed: Confidence building measures for FDs

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Would fixed deposits turn into an endangered species of savings instruments in the not-so-distant future? The question is not merely rhetorical. Driven by falling interest rates, more and more Indians withdrawing from FDs and pumping money into equity markets and mutual funds that are offering handsome returns to investors.

However, in the foreseeable future, a far larger number of our countrymen would continue to deposit their hard-earned money into fixed deposits than those who would embrace the risk of stock market directly or indirectly.

The attraction of FDs lies in their safety and predictability. The depositor exactly knows exactly what he is going to get and when. The money is also secure and there are no risks involved. In a country where a lot of people are struggling to make both ends meet in an increasingly uncertain environment, it is natural that people should prefer safety to risk and predictable moderation to uncertain high returns.

Despite this durable appeal of FDs, a huge section of people is dismayed by the continuous decline of interest rates. To trigger growth RBI has maintained low-interest rates that have also kept FD rates depressed. Moreover, banks, cautious lenders that they are, have become flush with funds, which, in turn is keeping lending rates low, which is impacting borrowing rates too.

Yet, there is a need to preserve the attraction of FDs as an asset class. The decline of rates to a level lower than CPI inflation is a blow to a huge multitude of people. The government correctly refrained from another round of cuts in interest rates of small savings. It is the collective duty of the government and banks to see that FDs don’t lose the faith of depositors totally. Earlier this week ICICI Bank and IDBI Bank raised select FD rates by a small margin. Others should follow suit to not only prevent migration but also to retain FD as an instrument of choice in difficult times.