Short-term FD has lower interest rate than savings a/c

Almost all the banks have slashed their fixed deposit rates. After this revision the interest banks are offering on the tenure between a month and 45 days is lower than the 3.5% minimum savings bank rate and some of the banks are not even giving any interest on short-term maturities.

Therefore at this time it is better to keep money in the savings bank account rather than investing in fixed deposits.

For instance amongst the private sector banks HDFC Bank is giving a 2.25% interest on deposits below Rs15 lakh for 15 to 29 days and only a 3% interest on deposits kept for 30 days to 45 days.

While the ICICI Bank is not giving any interest on deposits for 7 days to 14 days and offers only a 3.25% interest for deposits maturing between 15 and 45 days.

Whereas amongst the public sector banks State Bank of India (SBI) is offering only a 3% interest on deposits maturing in 15-45 days.

The savings bank account rate is fixed by the government therefore it can not be changed by the banks whereas it’s not the case with deposit rates.

Anindya Mitra, senior vice-president, retail liabilities, HDFC Bank explained, "We may think that the savings rate has to come down but we can't tinker with it and why should we pay more than 3.5% for short-term money when we can borrow one day funds from the inter-bank call market at 3%". Mitra added that companies, funds and high net worth individuals having huge amount generally invest funds in these tenures.

He stated, "For companies, it's still the better option to keeping huge chunks of money in current accounts at 0%. Some companies which do not even have a bank account open an FD".

On the minimum maturity period if you invest more money the banks give less interest. For instance ICICI Bank, offers only 1.5% interest on deposits from Rs15 lakh to Rs1 crore in the 7-45 days' tenure. While Canara Bank offers 1% for deposits of more than Rs1 crore for seven to 14 days and only 2% for deposits kept for 15 to 30 days.

Regarding offering very low interest rate on minimum tenure bankers say that there is enough liquidity in the system therefore they don't need short-term cash. According to SBI official, "These funds were used to give short-term bridge loans for companies just before their actual loans were being passed. These loans were in demand, particularly when the economic growth was brisk, but now that's not the case".