KARACHI, July 13: That the rate of return on bank deposits remained negative most of the time in the last fiscal year is evident from the gap between year-on-year CPI inflation during July-April 2003-04 and weighted average deposit rate of all the banks combined.

Analysis of the relationship between inflation and average bank deposit rate shows that in nine out of 10 months, CPI inflation or inflation measured by Consumer Price Index was higher than the average deposit rate.

What is more disturbing is the fact that the gap between inflation and deposit rate rose almost steadily (See Chart) and that the average return on deposits became more and more negative in seven out of 10 months under discussion.

In July 2003, weighted average deposit rate was slightly higher than the year-on-year increase in CPI in that month. And in January and February 2004 inflation fell by a bigger margin than the average deposit rates did.

Inflation numbers for all the 12 months of the last fiscal year are available. But the chart uses the numbers relating to the first 10 months because average deposit rates of the last two months of the outgoing fiscal year are yet to pour in. Weighted average deposit rate of all the banks combined fell from 1.70 per cent at end-July 2003 to 1.21 per cent at end-April 2004.

But year-on-year inflation measured through changes in CPI rose from 1.41 per cent in July 2003 to 5.99 per cent in April 2004. This indicates that the policy makers either had little room to make moves to alter this trend or else they were least concerned about it.

Year-on-year increase in CPI in a particular month refers to inflation measured through changes in average retail prices of 374 goods and services. Weighted average deposit rate of all banks indicates the average return on bank deposits arrived at after taking into consideration the maturity and the volume of deposits.

Senior bankers say that weighted average rate of return is normally lower than what the depositors actually get from the banks because zero-rated current accounts are included in the deposit base for the purpose of calculating the average deposit rate.

But as the deposit base of the banking system also includes a substantial chunk of fixed-term deposits of more than a year, comparing the average deposit rate with year-on-year rise in CPI undermines the full adverse impact of inflation on low deposit rates.

Despite these shortcomings, a comparison between CPI movement and the average rate of return on bank deposits provides an insight into how rising inflation takes its toll on the real value of people's income from these deposits.

As shown in the chart, the gap between inflation and average deposit rate rose phenomenally from 16 basis points in August 2003 to 478 bps in April 2004. Bankers say when data on average return on bank deposits in May and June 2004 would be out, the gap between these rates and inflation numbers would be even wider.

In May and June 2004, average deposit rates are expected to remain either static or show a very modest increase from the April 2004 level of 1.21pc. But inflation numbers for these two months are much higher than the April 2004 level of 5.99 per cent.

CPI moved up by 7.13 per cent in May and 8.45 per cent in June 2004 year-on-year. With the inflation numbers rising to these heights amidst expectations of very modest, or no rise in average deposit rates, the gap between the two may reach near 700bps at end-June 2004.