Fixed Deposits favorite among investors

After April the return levels on fixed deposits have increased up to 15-20%.

Banks have raised interest rates of fixed deposits therefore individuals have started investing money in fixed deposits (FDs), as the earnings have gone up by 15-20 %.

Hindustan Unilever employee Sachin Shah, 28, has found investing in FDs more profitable therefore in the last five months he has invested Rs 5 lakh in FDs. On new deposits he will earn around 9.5 per cent since he has invested for a one-two year term, compared to 8.25-8.75 per cent he will earn on the Rs 8 lakh he had deposited earlier.

Annually he will earn around Rs 50,000 on Rs 5 lakh deposit as compared to Rs 42,000 which he would have earned till April.

In July the central bank has tightened monetary policy by increasing repo rates, or the rate at which it lends, and cash reserve ratio, or the proportion of deposits that banks have to set aside, since then banks have been increasing lending rates by up to 100 basis points, but many banks have not increased deposit rates by the same scale.

For instance, State Bank of India has raised its prime lending rate by 100 basis points, but have increased deposit rates only by 25-75 basis points.

Many big banks including Axis Bank, Bank of Baroda, Union Bank of India and mortgage player HDFC, have not changed deposit rates to ensure better net interest margin. These banks have not given any indication regarding the increase in deposit rates.

“Deposit rates are market-driven and more dynamic. We can change it later as well,” said a bank chief.

While Partho Mukherjee, Axis Bank’s treasury head, said, “To be in competition, banks need to keep a close watch on deposit rates. Our assets and liability committee (Alco) will first see the impact of the recent rise in deposit rates by other banks. Before a further upward revision in interest rates on our FDs, we will assess the reaction of investors.”

The instability in the stock market has made FDs favorite for investments.

“I stopped investing in equities after January when the markets started falling. Moreover, FDs are very attractive. Now, I invest 40-50 per cent of my savings in FDs, and mostly in maturities of 15 months, because the best interest rates are offered on these tenures,” said Shah.