Time to lock your money in bank FDs

Investors looking at high returns on deposits should soon lock their money with banks since interest rates on retail
deposits may have peaked.
Bankers say the cut in repo rates on Monday indicates that this is the beginning of a soft interest rate regime. Further, they said they would first lower their fixed deposit rates and then reduce lending rates. This indicates that banks may come under pressure to reduce deposits rates.

Currently, most banks are paying a maximum rate of 10.5% for one to less than three years while senior citizens are entitled for 11%. Interestingly, the 10.5% offered on deposits for three years was last offered in 1999-00, following which the interest rate cycle began to turn southwards. Rates had fallen sharply to 5.25-5.50% in 2003-04.

The country’s largest housing finance company, HDFC, offers as high as 10.90% for 30 months if an individual deposits Rs 1 lakh and above. While for deposits below Rs 1 lakh, HDFC offers 10.55%. Among others, ING Vysya Bank is offering 11% for 365 days and 10% for 99 days.

ICICI Bank, which offers 10.5% for 390 days, 590 days and 890 days while rates for other tenures are lower. Although 10.5% for 390 looks attractive, ideally, a depositor should
invest in long-term deposits like 890 days. This will help them avoid a negative impact of lower interest rates.

This means that if a depositor parks his money in long-term deposits, even if the interest rate cycle turns, the depositor would gain. The highest rate on longest tenure is 10.5% offered by India’s largest bank, SBI, which is for 1,000 days. Similarly, Indian Overseas Bank offers 10.5% for 720 days and Canara Bank offers 10.5% for 500 to two years.

However, while parking money with banks, particularly for long term, depositors should carefully see the clause regarding the pre-payment of penalty. Penalty varies from banks to banks. SBI and Indian Overseas Bank charge 1% penalty if deposits are broken during the tenure.

Source: Economictimes