In a rising interest rate regime, special schemes and floating rate fixed deposits are good options.
Investors in fixed deposits are in for good times. Banks’ special fixed deposit schemes, which are of unusual tenures – for instance, 390 days and 550 days – are back in vogue. Similarly, considering we have entered a rising interest rate regime, floating rate fixed deposits are also emerging as a good option.
S Govindan, general manager, personal banking and operations, Union Bank of India, says, “When interest rates started declining in 2008, these schemes went out of favour.With rates rising, banks are pushing these aggressively.”
Last week, the Reserve Bank of India raised repo and reverse repo rates by 25 basis points and 50 basis points, respectively. This, and the rate increases earlier in the year, caused deposit rates to rise across tenures.
| WHAT’S ON OFFER | ||
| (In %) | 555 days | 1,000 days |
| SBI | 7.25 | 7.25 |
| Bank of India | 7.25 | 7.60 |
| Canara Bank | 7.25 | 7.50 |
| ICICI Bank | 7.00 (590 days) | 7.50 (990 days) |
| HDFC Bank | 7.00 (381 days) | 7.50 (746 days) |
Tenures on offer are more than a year (390 days), one-and-a half year (550 days) and around three years (990 or 1,000 days). The rate of return varies between seven and 7.50 per cent. In comparison, a regular one-year fixed deposit is fetching 6-6.5 per cent.
State Bank of India is offering 7.25 per cent a year for deposits which will mature in 555 days and 1,000 days. While Bank of India is offering 7.25 and 7.60 per cent, respectively, for these tenures, Canara Bank is giving 7.25 and 7.50 per cent, respectively.
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ICICI Bank is offering seven per cent for 590 days and 7.50 per cent for 990 days. HDFC Bank is offering seven per cent for 381 days and 7.50 per cent for 746 days.
“These schemes help banks bridge asset-liability mismatches by offering higher rates in a hardening interest rate regime for a long tenure,” says Moses Harding, head-global markets group, IndusInd Bank.
For investors in fixed deposits, these schemes look quite attractive in terms of returns. For instance, Aakarsh Joshi is planning to invest Rs 70,000 in these. “I am looking for safety. And these schemes are offering a high return as well,” says the 30-year old.
However, there should be a clear strategy. If you are opting for a tenure of less than two years, special deposit schemes make a lot of sense. If you wish to lock-in money for a long tenure, opt for floating rate deposits.
“Since one does not know when interest rates have peaked, floating rate deposits are a good option,” says Harding. He argues that even if you enter a floating rate scheme at a low rate, instead of a special deposit scheme, there is a good chance that the rates will get aligned. The scheme may even give higher returns when interest rates rise further.
However, bankers and financial planners advise a wait for another three-six months before locking-in money in long-term deposits. “At this point, retail investors should invest in 400-500 days’s schemes giving an average return of seven per cent. Once the rates rise, one can shift to higher-return schemes,” says Radhika Gupta of Forefront Capital.
Investing in short-term – say one or one-and-a-half year – special schemes will ensure the interest income will be higher now. Also, if interest rates keep rising, one can reinvest the money once these schemes mature.