Financial experts say deposit rates can rise further so don’t invest in long term FDs

Banks are raising their lending rates and fixed deposit rates since the time when RBI raised repo and reverse repo rates. Till now most of the banks especially the big commercial banks have raised their loan and fixed deposit rates, the increase by SBI is quite sharp.

After a long period investors in fixed deposits (FDs) will feel happy seeing the rates moving up. But market experts caution the investors in FDs that they should not hurry to invest in FDs aggressively it is just the beginning.

For instance, HDFC Bank has raised rates for 1year and 2 year deposits by 25 basis points to 7.5 per cent and 7 per cent, respectively. Bank has done the biggest rise for 6 months tenure, by 75 basis points.

The SBI has raised its rates between 25 and 150 basis points. The bank has done the biggest rise for the 15-45 day tenure, the rates has been increased from 2.50 per cent to 4 per cent i.e. by 150 basis points.

For 1 year to less than 2 years bank has raised rates by 125 basis points- from 6 to 7.25 per cent. For 181 days to less than a year, the rate has been raised from 5.25 per cent to 6 per cent.

According to financial planners the rate war can get hotter. Govind Pathak, director, Acorn Wealth says, “Don’t invest in FDs of more than one year. Also, don’t invest the entire holding in a single FD.”

He said one can divide large amount into small portions. For instance, Rs 1 lakh can be divided into four deposits of Rs 25,000 each. If the interest rates increase in, say, the next quarter, then you can withdraw the money from two deposits and invest in other higher-paying FDs.

Along with deposit rates the lending rates are also rising. The market experts say banks are reluctantly hiking lending rates because the retail lending has not taken off. According to many the teaser rates can sooner or later be withdrawn.

Currently, SBI is offering a teaser rate of 8% for the first year and 9% for second and third years. After that, the rate will be linked to the base rate. Likewise HDFC is also offering teaser rate at 8.25% in the first year and 9.25% in the second year. Then, the rate will be linked to the retail prime lending rate.

The experts caution home buyers that they should not rush for teaser rates, especially for buying an under construction property. Kartik Jhaveri, director, Transcend India said, “Potential home buyers need not rush to take that home loan, whether it’s a teaser rate or not, simply because it is a 15-20 year decision.”

He says if one plan to buy ready to possess property then going for teaser rates is good idea but for under-construction property a teaser rate scheme is not a good idea as EMI or interest payment of loan will start now. When the loan is disbursed entirely in the next two-three years, the teaser rate might no longer apply.

Jhaveri adds, “You will be stuck with the conditions of the teaser rate scheme that may be adverse compared to the base rate regime.”

SBI has launched a new product – floating rate term deposit linked to the base rate- according to market experts it is a novel idea. But they differ on the point whether retail investors should get into these products or not. Suresh Sadagopan, a certified financial planner says, “The basic reason for investing in a fixed deposit is assured returns. Any product that does not give assured returns is not meant for small investors.”

According to Pathak, director, Acorn Wealth, one can go for this product but only for one or two years. He explains, as interest rates are rising for some time therefore it makes sense to be in these products. Pathak says, “In a falling-rate regime, these may not make much sense.”

SBI under its new scheme is offering a floating rate of 7, 7.25 and 7.5 per cent for 1, 2 and 3 years, respectively. While Housing Development Finance Corporation has two such products- a regular product for individuals and a systematic savings plan.

SBI is offering 6.9-8.25 per cent for different tenures. The HDFC had launched the scheme 6 months back which allows people to invest in parts, just like a recurring deposit. Thus you can invest as little as Rs 2,000 to as much as Rs 50,000 for 24 to 60 months. The rates vary from 7.25 to eight per cent (two-five years). Last year Indian Overseas Bank also introduced similar product.