Bank fixed deposit [FD] rates are at an almost 4-decade low making the most favourable investment option of India’s middle class less and less attractive. As the Reserve Bank of India (RBI) keeps the liquidity position in the Indian financial system at a high, in order to mitigate the impact on the Covid-19 pandemic and spur consumption, the ripple effect is being seen on FDs, considered a risk-free savings instrument that provides fixed returns.

“You can’t put your bank money in a FD anymore,” says Nikhil Kamath, co-founder of Zerodha and True Beacon. Valued at about $2 billion, Zerodha is the biggest stock broker in India in terms of active retail clients. Speaking to Fortune India, Kamath says that we are accustomed to 7% to 8% returns on our bank FDs. In fact, during the 1990s FD rates were in the 10% to 12% range. “Now when it says 4% and inflation is 4.5% to 5%, it [FDs] doesn’t make sense,” says Kamath.

Even once the dust of the pandemic settles, bankers are wary about FD rates bouncing back to the pre-Covid-19 levels. Of course, all would depend on how long the RBI continues its ‘accommodative stance’ to aid economic recovery.

But for savvy investors, other more lucrative investment options such as tax free bonds—of Indian Railways, national highways and government securities—that offer a higher rate of return are an option. “A bank at the end of the day can shut down, but these bonds are backed by the Government of India and they are fairly liquid. So people are consistently moving on to more efficient instruments,” says Kamath. The stock markets, too, have become a preferred choice for investors who are looking at returns well in excess of 10%. Wise investors, says Kamath, would be moving their FD monies into the Indian equity markets, which had seen their best ever financial performance in over a decade in fiscal 21. While the S&P BSE Sensex rose by 68%, the Nifty 50 index was up by 71%. Interestingly, according to Kamath, in a population of 140 crore people only about 2 crore Indians have anything to do with equity markets. In this backdrop, banks, says Kamath, have lost the power to attract money like they once had with just that FD rate. “I think it's a big systematic risk for banks in the next decade,” he adds.

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