Banks hiking deposit rates investors can look for better times

Again the traditional bank fixed deposit will give good returns and investors can look forward to better times. In last few weeks several banks have increased their deposit rates after taking cue from RBI’s recent hike in cash reserve ratio.

Since the last week of January more than 24 banks have hiked rates and there have been increase of 25-150 basis points in bank deposit rates, depending on the term of the deposits.

Majority of the private banks and foreign banks such as HDFC Bank, ICICI Bank, Yes Bank and Kotak Mahindra Bank; foreign banks such as Standard Chartered Bank and HSBC; have hiked the deposit rates and amongst the public sector banks IDBI Bank, Union Bank of India, Indian Bank and Bank of India have hiked their deposit rates. But some of the large public sector banks such as State Bank of India, Bank of Baroda and Punjab National Bank still have to take decision on hiking the rates.

Most of the banks have hiked rates for the 1-2 year and 2-3 year deposits. The banks such as Kotak Mahindra Bank and HDFC Bank have hiked deposit rates more than 75 basis points for deposits of more than three years.

The banks liquidity is being flushed out in spite of that they are increasing deposit rates. It is believed banks are hiking rates as companies are demanding more credit and also RBI is likely to increase rates to control high inflation.

As a result of increase in deposit rates the flow of liquidity in deposit is also increasing. According to RBI figures for the fortnight ended February 26, Scheduled Commercial Banks have seen rise in deposit inflow (around Rs 40,000 crore as against Rs 20,000 crore for the fortnight ended February 12).

But the hike in deposit rates is the indication of hardening of interest rates. Moreover due to prevailing high inflation the investors won’t get much benefit from the increased deposit rates.

In spite of hike the investors who have invested big amount in fixed deposit will see negative post-tax real returns while for the conservative investors hike in deposit rates is good news.

At present 1-year term for deposit is most favorable and as the terms draws near to maturity period the investors can decide for long –term after carefully studying the rates.

The banks are not hiking deposit rates for short –term i.e. for less than six months, thus investors have to invest for long tenures in such case 1-year tenure is the good option.

As the banks have started increasing the deposit rates therefore investors should wait to get a decisive idea on the increase.

The second option can be to invest in a 91-day bank deposit at 5-5.5 per cent, then on maturity reinvest for 9- months on which they can get interest rate of up to 7-7.5 per cent. This way an investor will be able to improve his overall return.

However the investors will earn less this way rather than by investing in a one-year deposit.

Amongst the public sector banks State Bank of Travancore, Vijaya Bank and UCO Bank are offering attractive propositions, for one-year deposits the rate is 7 per cent. Although these banks have not hiked their rates recently but are still better than those who have revised rates since February 2010.

For instance banks such as Indian Bank and Bank of India are offering lower rates at 6.75 per cent on their one-year deposits, even after the hike.

On the other hand private banks such as Catholic Syrian Bank, Karur Vysya Bank and Lakshmi Vilas Bank are offering 7.5 per cent, 7.25 per cent and 7.25 per cent respectively on one-year deposits.

Some of the banks had launched special deposit schemes under which they are were offering better rates compared with the usual schemes. . The best of the special offer schemes comes from City Union Bank, which offers 7.5 per cent for its 400-day scheme.

Most of the banks are also offering senior citizens additional 25-50 basis points higher for deposits that mature later than six months.

The bank deposits have lower risk and the return is also low. However there are few companies who have deposits offering high return but the risk factor is high.

For instance, corporates such as Unitech offers one-year deposits at 11 per cent. Also, non-banking finance company such as Dewan Housing Finance is offering 9 per cent interest on its one-year deposit.

There are chances that non-banking companies such as Shriram Transport Finance and Sundaram Finance might hike their deposit rates.

The investors who can take higher risk can invest in companies’ deposits for short term up to one year.