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As deposit rates zoom, FDs turn attractive

With fresh round of rate hikes by banks in the first week of January, fixed deposits (FDs) have started yielding net positive returns after a year, as their rates of return have surpassed the rate of inflation.

business Updated: Jan 11, 2011 21:05 IST
Sachin Kumar

With fresh round of rate hikes by banks in the first week of January, fixed deposits (FDs) have started yielding net positive returns after a year, as their rates of return have surpassed the rate of inflation.

After recent hikes FD rates have touched 9.25% after a year, while the Wholesale Price Index-linked inflation was 7.48% for the November 2010. In 2010, depositors got negative returns as inflation was more than deposit rates for most of the year.

"In the near term, inflation is likely to moderate because it is primarily driven by prices of food items and these will cool down in coming days," said Vijayalakshmi R Iyer, executive director, Central Bank of India. "With deposit rates likely to remain firm, deposits will continue to yield positive returns."

However, WPI inflation figures for December will be announced soon. With food prices raging unchecked, the inflation rate may well go up.

In the last leg of December 2010 and in the first week of January, all banks revised their deposit rates upward. India’s largest lender State Bank of India is offering 9% interest on deposits while IDBI bank is offering 9.25% for deposits of 1,100 days. Other banks are offering interest rate in the range of 8.25%-9 %. Banks offer senior citizens an additional 0.5% interest on FDs.

"Those who want to enhance portfolio of fixed income, they can invest in fixed deposits," says Vishal Dhawan, a certified financial planner and founder of Plan Ahead Wealth Advisors. "From now to next three months, it is a good time to invest in fixed deposits."

In January 2010, deposit rates of banks were around 7.75% while inflation for the month stood at 8.56%, turning FDs into an unattractive investment option. For the rest of the year, inflation kept rising, even touching double-digits at 10.16% in May, before easing to 7.48% in November. But deposit rates hovered in the 8% range throughout the year.

The recent hike in deposit rates is due shortage of funds for the banks due to liquidity tightness in the system. By increasing the deposit rates banks want to mobilise deposits, which are source of low-cost funds.