X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
4 Reasons Why Banks Are Likely To Reduce Deposit Rates - Outside View by PersonalFN

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

4 Reasons Why Banks Are Likely To Reduce Deposit Rates
May 9, 2017

The interest rates on your bank fixed deposit are dropping further...

Reasons for this is :

  1. Primarily, there's excess liquidity in the system. According to the Reserve Bank of India (RBI), surplus liquidity in March 2017 was to the tune of Rs 4.8 lakh crore (though down from the peak of Rs 7.9 lakh crore in January 2017).
  2. Further, credit growth in the economy post-demonetisation has been rather tepid. The outstanding credit of all Scheduled Commercial Banks (SCBs) has dropped to Rs 2.5 lakh crore in the fortnight ended April 14, 2017.
  3. Banks aren't finding much prudence in holding on to high cost deposits, as borrowing rates too have come down.
  4. Many banks are offering a higher rate of interest on saving bank accounts; to balance this, reducing deposit rates seems warranted.

State Bank of India (SBI) - the country's largest public sector lender - has reduced its term deposit rates by upto 50 basis points (bps) for medium to longer maturity buckets for an investment amount below Rs 1 crore owing to this scenario.

Thus now, a 2-year to less than 3-year term deposit (or FD) with SBI offers a 'non-senior citizen', a rate of interest @ 6.25% p.a. vis-a-vis 6.75% p.a., and if you're a 'senior citizen', a 50 bps more i.e. 6.75% as against 7.25% for the said tenure.With this many other public sector and the private sector banks are likely to follow suit.

Bank Fixed Deposit Rates
Banks 1-Yr (%) 2-Yr (%) 3-Yr (%) > 5-Yr (%)
State Bank of India 6.50 6.25 6.25 6.25
Canara Bank 6.90 6.90 6.90 6.90
Central Bank of India 6.60 6.50 6.50 6.50
Bank of India 6.90 6.85 6.70 6.70
Bank of Baroda 6.90 6.90 6.90 6.50
Dena Bank 6.90 6.90 6.90 7.00
ICICI Bank 6.90 6.75 6.75 6.50
HDFC Bank 6.90 6.00 6.00 6.00
Axis Bank 7.00 6.75 6.75 6.75
HSBC Bank 5.00 6.50 5.00 5.00
Kotak Bank 6.75 6.50 6.25 6.00
Yes Bank 7.10 7.10 7.10 7.10

As on May 2, 2017 for deposits less than Rs 1 crore
(Source: websites of respective banks, PersonalFN Research)

In fact, Canara Bank was the first to take cue, announcing a 10 bps reduction in rates for 1-year FD rate. Likewise, Bank of Baroda has reduced rates by 10 to 25 bps across maturities. And among the private sector ones, Axis Bank revised its deposit rates to lower.

So, it's perceptible that banks are worried about their Net Interest Margins (NIMs).

In such a scenario where should a risk-averse person invest?

The Government has reduced rates on Small Saving Schemes (SSS) viz. Public Provident Fund (PPF), Kisan Vikas Patra (KVP), and Sukanya Samriddhi Yojana by 10 bps recently, yet they are visibly higher compared to bank FDs.

This provides you with an opportunity to invest in SSS; however, not all of these are tax efficient. Barring Sukanya Samriddhi Yojana (which can help you plan for your daughter's future needs: higher education and marriage), and Public Provident Fund (which can contribute towards living a blissful retired life) not all enjoy an E-E-E (Exempt-Exempt-Exempt) status. Meaning, the interest earned on many other small saving instruments viz. NSC, KVP, POMIS, POTD, SCSS, etc. is taxable.

Hence, broaden your horizon and consider investing in debt mutual fund schemes to earn relatively better tax-adjusted returns. But adopting a sensible approach is the first step. Pay attention to the interest rate cycle while investing in debt mutual funds. Remember, not all debt mutual fund schemes are befitting across interest rate cycles; there is risk involved.

In the current scenario, where RBI has changed its monetary policy stance from 'accommodative' to 'neutral', a right to even increase policy rates is reserved if inflation pops it ugly head. Hence, first selecting the category of debt mutual funds becomes crucial.

PersonalFN is of the view that, investing at the longer end of the yield curve could prove imprudent. To put it simply, investing in long-term debt fund holding longer maturity debt papers can be perilous, since most of the rally has been captured already at the longer end of the yield curve and there's not much steam left. Instead, you'll be better-off if you deploy your hard-earned money in short-term debt funds; but ensure you're giving due importance to your investment time horizon and asset allocation.

For an investment horizon of upto 2 years, consider investing in short-term debt funds.

If you have an investment horizon of 3 to 6 months, ultra-short term funds (also known as liquid plus funds) would be the most suitable.

And if you have an extreme short-term time horizon (of less than 3 months), you would be better-off investing in liquid funds.

If you need research backed recommendations to select the best debt mutual fund schemes for your portfolio, opt for PersonalFN's DebtSelect research reports. Our superlative guidance will certainly help you on the path to wealth creation. You can be rest assured about the ethical and unbiased nature of this service.

To define the most appropriate asset allocation and/or to rebalance your portfolio in the interest of your long-term financial wellbeing, reach out to a Certified Financial Guardian in your vicinity, who is a mark of trust and respect.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "4 Reasons Why Banks Are Likely To Reduce Deposit Rates". Click here!

  

More Views on News

Two Meetings That Nailed the Idea of Owning Brilliant Smallcaps Without Buying Them (The 5 Minute Wrapup)

Mar 22, 2018

Certain blue chips hold the potential of delivering returns comparable to small-cap stocks. With these stocks, you can get the best of both worlds.

What They Forgot to Tell You About Sensex at One Lakh (Profit Hunter)

Nov 29, 2017

Stocks that could beat Sensex returns in the long term.

Is Mutual Fund Categorization Affecting Your Portfolio? Review It Now! (Outside View)

Jul 18, 2018

PersonalFN explains why a mutual fund portfolio review is necessary, particularly after the regulator's mutual fund categorisation norms.

A Sense of Melancholy (Vivek Kaul's Diary)

Jul 18, 2018

...

Mere Paas HRITHIK Hai... The Mother of All Trading Stocks (Profit Hunter)

Jul 18, 2018

You are missing out big gains if you don't own these 8 stocks.

More Views on News

Most Popular

How to Avoid a 90% Loss Suffered by This Super Investor(The 5 Minute Wrapup)

Jul 12, 2018

Blindly following super investors is a dangerous game to play. Here's how you can avoid such mistakes.

The Answer to Your Wealth Worries: Small Caps (Especially Now)(Profit Hunter)

Jul 10, 2018

If you're worried about the markets - you are on the wrong track. This is opportunity - put your wealth-building hat on, instead - Richa shows you how...

The Multiple Problems with the Minimum Support Price (MSP) System(Vivek Kaul's Diary)

Jul 11, 2018

The price signals that MSP sends out, creates its own set of problems.

New Fund Offer - ICICI Prudential Pharma Healthcare and Diagnostics Fund - Should You Invest?(Outside View)

Jul 6, 2018

ICICI AMC launches an open -ended equity fund following Pharma, Healthcare, Diagnostic and allied theme.

When Disappointment Panda is Around. Buy Quality Stock like This!(Chart Of The Day)

Jul 6, 2018

Buy Companies that can fight all kinds of Pandas and Bears in the long run.

More

Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Jul 19, 2018 09:37 AM

MARKET STATS