Retail term deposits can be for as little as 7 days

MID-TERM REVIEW OF ANNUAL POLICY 2004-05/ IMPARTING FLEXIBILITY

Retail investors can now maintain fixed deposits with a minimum maturity of as little as seven days.

The Reserve Bank of India (RBI) has permitted banks to reduce the minimum tenor of retail domestic term deposits under Rs 15 lakh from 15 days to seven days. This will impart flexibility to financial planning by households.

The central bank's move in the mid-term review of the annual policy for 2004-05 has brought the wholesale term deposits on par with retail term deposits. The minimum maturity of wholesale domestic term deposits worth Rs 15 lakh and more is seven days.

Banks, however, would continue to have the freedom to offer differential rates of interest on wholesale domestic term deposits of Rs 15 lakh and above as at present, said the policy.

"It is a good move by RBI to rationalise the deposit products. It gives investors yet another avenue to park their short-term surplus funds," said Rajiv Anand, head-investment, Standard Chartered Mutual Fund. "There could be two fallouts from the reduction in the tenor of retail term deposits. One, there would be slight increase in the cost of funds for banks with depositors choosing to park their short-term surpluses in fixed deposits rather than in savings accounts. And two, is the possible increase in business with investors preferring fixed deposits over mutual funds," said the treasury head of a PSU bank.

But Anand said that investors are not likely to pull money out of mutual funds.

"I do not see investors pulling out money from mutual funds to park the surplus in deposits since the returns on floating rate funds will now go up with the hike in the repo rate. I do not see mutual funds losing business. Plus, these short-term investments are not very rate sensitive. However there could be some movement of funds from savings deposits to fixed deposits."

While the 15-day fixed deposits are today priced at 3 per cent, the new 7-day deposits are likely to be priced between 2.25 to 2.50 per cent, said a banker. Savings accounts offer a interest rate of 3.5 per cent.

Even though savings accounts offer a higher interest rate, the interest is calculated on the minimum balance in the account between the tenth of every month and the last day.

So if an individual has surpluses to deploy in the first nine days of the month, he would much rather prefer a 7-day fixed deposit over a savings deposit.

Key takeaways

• Minimum tenor of retail term deposits reduced from 15 days to 7 days
• Retail term deposits brought on par with wholesale deposits
• Move may impact the flow of investment to mutual funds
• Banks' cost of funds likely to increase