FDs? You will soon make a loss!

Interest earning on fixed deposits may turn negative amid rising inflationary pressures, as the petroleum price hike is likely to increase the rate of inflation by another one per cent.

Deposit rates need to be jacked up if the inflation goes beyond 9 per cent, UCO Bank chairman and managing director S K Goel told PTI. "We are having a meeting on Friday where a decision with regard to increasing deposit rates would be taken," he said.

Rising inflation will put pressure on banks to jack up deposit rates in order to keep them lucrative, he said.

For those depending on earning from deposits, such as elderly people, the real rate of interest will soon turn out to be negative as inflation may soar up by as much as one per cent in the coming months after the direct and indirect impact of petroleum price hikes start reflecting, analysts feel.

Real rate of interest is defined as deposit rates minus the rate of inflation, which stood at 8.1 per cent for the week ended May 17.

Fixed deposits for less than one year, which attracts rate around 7 per cent, is already earning negative returns.

"Inflation could cross 9 per cent in the near term owing to petrol price hike," Abheek Barua, chief economist, HDFC Bank. Inflation was over 9 per cent nearly 13 years back in September, 1995.

State Bank of India recently hiked interest rate on 2-3 year deposits by 0.25 per cent to 8.75 per cent. The rate of interest in real terms is negligible as compared to five months back when inflation was around 4 per cent.

Inflation: The silent killer!