Join to long-term investment with bank deposits, that will earn you more when rates fall in the coming months.

The Reserve Bank of India (RBI) has raised interest rates nine times in the past year (since March 2010) — the reverse repo rate has been increased by 275 basis points and repo by 225 bps — to tame high inflation. All banks have passed on the benefits to customers by increasing deposit rates across all maturities.

The country’s largest lender, State Bank of India (SBI), has raised deposit rates by 100-225 bps for all tenures up to 180 days. SBI now offers 6.25 % on deposits of seven to 90 days, and 7 % on deposits maturing in 91-180 days.

Over a dozen other banks like Punjab National Bank, ICICI Bank, Oriental Bank of Commerce and Corporation Bank, have raised rates in the past week to 10 days. Bank of Baroda, IDBI Bank and Union Bank of India raised their short-term deposit rates by a similar 50 bps. HDFC Bank raised rates on shorter tenure deposits; a six-month deposit now offers 6.75 % and it’s 7.25 % for one year.

WHAT TO DO?
This has left many retail investors confused about investments in fixed deposits (FDs). “Will it be better to invest for six months or so and withdraw or should I stay invested for long?” asks Chennai-based software engineer Rajeswari Thatchet. Though there is no doubt that FDs are a lucrative option, Thatchet’s question is also valid. She has close to Rs 50,000 surplus, which can be easily locked for up to a year.

D Sundararajan of Trendy Investments says while it is always beneficial for retail investors to stay put for the longer term, he/she should avoid shorter tenure deposits when interest rates are likely to fall any time. After the deposit matures in the short term, you won’t find any good debt instrument, as the rates may have fallen by then. “The interest rates will only fall after, may be, one more 25-50 basis points hike,” he adds.

With inflation likely to fall only by the end of this year, industry experts say the apex bank may have to go for another round of rate raises. So, may be there is more on offer for you in the near future. Experts advise to opt for deposits of at least one to two years. Therefore, Thatchet should look for at least a one-year deposit. Presently, SBI is offering 7.75 % for one year and ICICI Bank is giving 7.5 %. She could wait for the next round of rate hikes as well for even higher rates.

“If you invest in a long-term deposit, you will benefit by earning a higher rate even if the central bank cuts rates. Also, returns from short-term deposits are not attractive, as they are lower that other fixed income products,” says S Govindan, general manager, personal banking & operations, Union Bank. Most short-term deposits are offering between 6 and 7 %.

If the the rates go further up, you can always break the deposit and invest in a higher return one. But you will be penalised for premature withdrawal. For breaking it within six months to one year, you must pay 3 %. If breaking between one and two years, it is 2 %.

Govindan suggests you invest in a short-term deposit only if it is offering 9 % or more. That is, it is comparable with other fixed income products like the employee provident fund and public provident fund.

Source: [Business-Standard]