Fixed deposits (FDs) are among the most trusted investment instruments in India. They promise safety, predictability, and assured returns. A double-digit interest rate like 12% per annum sounds especially attractive. But the real question investors should ask is not “How much interest will I earn?”—it is “How much will my money actually be worth?”
That’s where inflation enters the picture.
Inflation silently erodes purchasing power. Even though your FD balance grows on paper, the real value of both your interest income and principal keeps shrinking over time.
Let’s break this down with numbers.
Key Assumptions
To keep the analysis realistic and consistent, we’ll assume:
- Principal (FD investment): ₹1,00,00,000 (₹1 crore)
- FD interest rate: 12% per annum (simple annual interest paid, principal unchanged)
- Annual interest income: ₹12,00,000
- Average inflation rate: 6% per annum (close to India’s long-term CPI average)
- Time horizon: 30 years
- Interest is withdrawn each year (not reinvested)
Understanding “Real Value”
To adjust any future amount for inflation, we use:
Real Value after n years
= Nominal Amount/[(1 + Inflation)^years]
Here, inflation = 6% = 0.06
Inflation-Adjusted Annual Interest Income
Your annual interest stays ₹12 lakh nominally, but its purchasing power declines every year.
| Year | Nominal Interest (₹) | Real Value after Inflation (₹) |
|---|---|---|
| 1 | 12,00,000 | 11,32,075 |
| 5 | 12,00,000 | 8,97,000 |
| 10 | 12,00,000 | 6,70,000 |
| 15 | 12,00,000 | 5,01,000 |
| 20 | 12,00,000 | 3,74,000 |
| 25 | 12,00,000 | 2,79,000 |
| 30 | 12,00,000 | 2,08,000 |
What this means
By Year 30, your ₹12 lakh annual interest has the buying power of just about ₹2.1 lakh today.
That’s an 83% loss in real income, despite “earning” 12% every year.
Inflation-Adjusted Principal Value
Your principal remains ₹1 crore in nominal terms—but inflation doesn’t care.
| Year | Nominal Principal (₹) | Real Value after Inflation (₹) |
|---|---|---|
| 1 | 1,00,00,000 | 94,34,000 |
| 5 | 1,00,00,000 | 74,70,000 |
| 10 | 1,00,00,000 | 55,80,000 |
| 15 | 1,00,00,000 | 41,70,000 |
| 20 | 1,00,00,000 | 31,20,000 |
| 25 | 1,00,00,000 | 23,30,000 |
| 30 | 1,00,00,000 | 17,40,000 |
What this means
After 30 years, your ₹1 crore principal is worth only about ₹17–18 lakh in today’s money.
In real terms, you have lost over 80% of your capital’s purchasing power.
The Big Picture
Even with a seemingly generous 12% FD rate:
- Inflation at 6% cuts your real returns dramatically
- Interest income becomes weaker every year
- Principal preservation is an illusion in long-term fixed-income investing
This is why:
- FDs work well for short-term stability
- They are poor long-term wealth creators
- They are best used as a portfolio stabilizer, not the core growth engine
Final Takeaway
A fixed deposit protects your money from volatility, not from inflation.
If your goal is:
- Retirement planning
- Long-term wealth preservation
- Maintaining purchasing power across decades
Then relying heavily on FDs—even at high interest rates—can quietly leave you poorer in real terms.
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