Return Expectations

Consumer price inflation (CPI) in May 19 has been 3.05% which is very low and expected to remain so in future. Reserve Bank of India has made a forecast of 2.9-3.3% inflation (CPI) in rest of 2019-20 financial year. In this scenario return on investment are bound to come down as we cannot have such a high real return in the economy. Real return is return over inflation.

Historically gold has provided 2% real return, bank deposit 2.5% and BSE 30 index 8.4%. If we expect inflation to remain around 3% as per RBI forecast Absolute return on gold, bank deposit and index will be 5%, 5.5% and 11.4%. We should expect bank FD rates to reduce further. Even equity investor should moderate their expectation of return to 10-12% which will still be best return in any asset class.

However, this scenario presents challenge for retirees who will see a reduction in their earning as absolute return comes down. Some incentive for retirees like higher interest rates on FD for senior citizen and fixed pension schemes will protect the income up to some extent but will not fully compensate.