Bank on right areas to get maximum benefit
With investors focusing on interest rates, borrowings and inflation in the last few weeks, Arnav Pandya tells what investors need to understand to get the best deals from their banks.Updated: Jul 02, 2008 22:47 IST
The focus of investors has been on interest rates, borrowings and inflation in the last few weeks. This meant that banks and their action have been in news for the entire duration. Individuals deal with banks in various roles and they need to understand how to get the best from their bank.
One of the main features that attract investors to banks is the deposit product. In a rising interest rate scenario, deposit rate also has to rise to induce investors to keep their money with the bank.
While choosing a product, investors should search for the best option because there can be a difference of 2-2.5 per cent interest rate on various deposits of specific maturity period. In case of rising rates, investors need to confirm that their bank has raised the interest rates following the changes happening in the economy before investing. Another factor that will determine the investment time will also be the expectation going forward, because higher rates in the future will mean that the investor will prefer to wait for some more time and then make the deposit.
There are two kinds of decision that come with borrowing. One is whether a fresh borrowing should be made right now or postponed for some time. The other is the kind of borrowing that should be undertaken because the features here will determine the rates that will be charged.
Anyone who feels that the interest rates are high should desist from borrowings for some time. But again, there is a risk that the rates might go up further in the future resulting in higher cost for the borrower. In terms of the nature of borrowing, one of the best strategies to adopt in a high interest rate scenario is to take a floating rate that can witness a lower rate going forward, especially when it is a long-term loan rather than lock in a high fixed rate.
There is also another investment option present for investors and this is actually buying shares of banking companies. High interest rates do not signify anything for the performance of banking companies unless some other parameters are considered alongside.
The borrowing and lending rates and the spread between the two determine the profitability of banks. If this is declining and there are risks that the loan disbursement or demand will fall because of high rates, then there will be an impact on the stock prices.
Currently there are other determinants too like the loan waiver scheme and this will also impact the price movements. Investors should look at the valuations but invest only when the future outlook is stable.