The past year has been good for debt investors. With returns of 10 per cent, sometimes even more, fixed deposits (FDs) and debt instruments have done quite well compared to the equity market.
But things could change. So, if you have been waiting to invest in FDs, it could be just the time to get locked into one. With indications that interest rates have peaked and would start declining gradually, current FD rates may be the highest that investors could look forward to, for some time.
Anil Rego, chief executive officer, Right Horizons, says “Our estimate is that over the next six to nine months interest rates should go down by around 50-75 basis points. It is wise to lock in at current rates. Keeping in mind the situation in the medium term (one-two years), it would be prudent to lock in surplus funds for the best tenure.”
| KEEPING IT SAFE Bank fixed deposit returns on investment of Rs1 lakh | |||
| Bank Name | Duration | interest (%) | amount (Rs) |
| The Catholic Syrian Bank | Above 2 years to 3 years | 10 | 1,33,100 |
| State Bank of Bikaner & Jaipur | 3 years and up to 5 years | 9.5 | 1,31,294 |
| Dena Bank | 3 years to less than 5 years | 9.3 | 1,30,575 |
| ICICI Bank | 2 years to less than 5 years | 9.25 | 1,30,396 |
| HDFC Bank | 2 years 17 days to 3 years | 9.25 | 1,30,396 |
| Bank of Baroda | 1 year and above up to 3 years | 9 | 1,29,502 |
| State Bank of India | 2 years to less than 3 years | 9 | 1,29,502 |
| Punjab National Bank | 1 year to 5 years (except 111 days) | 8.75 | 1,28,613 |
| Source : Way2goals.com | |||
Some rate cuts have already started. Earlier this month, State Bank of India cut interest rates on FDs by 25 basis points. However, some like Punjab National Bank have increased rates marginally. But, the overall trend, going forward, is likely to be lower rates.
The highest rates that most banks currently offer on FDs range between nine per cent and 9.25 per cent for periods of between two and three years. As FDs offer stable and guaranteed returns and easy liquidity, they should be part of an investors’ investment portfolio.
But they are not tax efficient. So, returns from FDs will have a tax element, according to the income tax bracket of the investor. In addition, the real return will barely match the inflation rate of seven per cent (wholesale price index or WPI). But, it is still better than Sensex returns of 5.05 per cent in the past year.
For instance, if someone in the highest income tax bracket of 30 per cent had invested in a fixed deposit at 10 per cent, his post-tax returns would be seven per cent – same as the WPI rate. Of course, if one takes consumer price index into account, the returns would be lower.
Alok Agarwala, head-research, Bajaj Capital says that given the current macro economic situation, bank FD rates are unlikely to go up. Though interest rates may not come off sharply, the underlying trend in interest rates is downwards. “Going ahead with liquidity easing it will be tough for banks to increase deposit rates further. So, the probability of interest rates going up from these levels is low,” he says.
Whether banks will reduce deposit rates or not depends to a large extent on whether the Reserve Bank of India (RBI) will cut its key short-term rates. However, the rate change by banks happens with a lag and is not uniform, says Anis Chakravarty, senior director, Deloitte India.
“A rate hike by RBI will happen only if inflation shoots up by 200 basis points, which seems unlikely. Inflation may, at best, move up by 50-75 basis points due to the drought,” he says.
The tenure for the FD will depend on individual investors’ requirements and goals, says Piyush Sheth, of Plan Invest Advisors. “At the moment FDs are giving the best returns. These rates will continue for at least three to four months, after which they may start declining. But FDs may not be the best option for investors in the highest tax bracket,’’ he adds.
There are other options in the debt space as well. Besides mutual funds, investors can also consider FDs from reputed and highly rated companies that are offering higher interest rates on comparable tenors than banks. Company FDs are currently offering more than 10 per cent returns. But, investors must consider ratings and fundamentals of the company, says Rego. It is prudent to look at only ‘AA’ and “AAA’ rated companies.
When interest rates start declining, cost of companies will also come down, thereby improving their margins. This will, in turn, lead to higher returns on company FDs, says Rego.
