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Earn more on your deposits as banks hike rates

india Updated: Aug 03, 2010 01:43 IST
Sandeep Singh

Commercial banks have followed the Reserve Bank of India's move , barely a day after the central bank announced a hike in repo and reverse repo rates. Major banks announced an increase in their deposit rates between 25 and 100 basis points (0.25 to 1.0 percentage points), offering investors an opportunity to earn more on their investment with banks.

On Monday, Corporation Bank raised its deposit rate by 0.5 percentage point and Axis Bank too announced a hike in deposit rates after leading banks such as HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Union Bank of India and Central Bank of India already announced their new deposit rates.

Experts feel that with inflation worry around, RBI will continue with tightening of rates and the interest rates will move upwards for now.

"More hikes are expected to follow," said Abheek Barua, chief economist, HDFC Bank. "With liquidity situation expected to remain tight there is a high probability of repricing of deposits."

In such a scenario, debt market investors should clearly focus on short-term instruments like short-term fixed deposits or short-term debt funds, say experts.

"Investors should not lock into long-term products as the rates are likely to go up and the best strategy would be to invest in short-term funds so that when the rates go up further they can invest in those instruments," said Surya Bhatia, a Delhi based financial planner.

Experts opine that short-term debt funds by mutual funds have an edge over the short-term fixed deposits.

"They offer the option to exit and also generate a higher return because of the corporate papers they hold in their portfolio that offer higher returns and a better post tax return," said Bhatia.

Some experts say that investors can even wait for a month and park their money with liquid funds before they get into a short-term fund.

"The can wait for more clarity and some more hike in rates to come in before investing into short-term funds, but clearly they should not lock into long-term debt products," said Amar Pandit, a Mumbai based financial planner.