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HindustanTimes Wed,24 Sep 2014

Interested in FDs? Invest now, rates may fall on May 3

HT Correspondent, Hindustan Times  Mumbai, April 17, 2013
First Published: 22:03 IST(17/4/2013) | Last Updated: 22:06 IST(17/4/2013)

If you are planning to park money in a term deposit in a bank, this may be the most appropriate time.

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The Reserve Bank of India (RBI) is likely to cut lending rates in its monetary policy review on May 3. If that happens, banks, too, are expected to follow suit and lower the interest rate they pay on fixed deposits (FDs).

"The inflation rate is expected to fall in the coming months, and RBI is likely to cut policy rates in May. The trend for the interest on fixed deposit rates, in the short term, is to go down by 0.25-0.50 percentage points," said M Narendra, CMD, Indian Overseas Bank.

However, most banks did not cut deposit rates when RBI cut policy rates by 25 basis points each in January and March this year. A hundred basis points make one percentage point.

"Unlike the January-March quarter, the liquidity situation is also comfortable, which will allow banks to cut fixed deposit rates," he said.  

Another reason that could push bank in this direction is the low demand for credit in the first half of a financial year. April-September is considered a lean season for banks as the demand for credit is low during this period, compared to the latter half.

Banks are at present offering 7%-8.75% interest on deposits in the tenure of one year to less than two years. Deposits of two to five years' maturity earn 8.75%-9% interest.

"Rather than putting all money in one FD, retail investors should invest in deposits maturing at different points of time. This will protect depositors from reinvestment risk; if someone puts all his money in a one-year FD, he will have to again think of reinvesting the money in other deposits when interest rates decline," advised Vishal Dhawan, founder of Plan Ahead Wealth Advisors.

Finacial planners also suggest that bank FDs should be preferred by those investors who are not clear about when they will require liquid cash.

"Bank FDs are more liquid compare to bonds and can by broken by giving specified penalty if any financial urgency crops up," Dhawan said.


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