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Time to lock into high-yield fixed deposits


M.V.S. Santosh Kumar

The year 2011 has already brought cheer to bank depositors who had to contend with low interest rates for more than 21 months now. This New Year, State Bank of India (SBI) has come up with yet another round of rate hikes; second time in less than a month which make the rate of interest relatively attractive for a retail depositor. Around 10 banks have hiked deposit rates over the last fortnight.

ICICI Bank, IDBI Bank and State Bank of Patiala, taking cues from SBI, hiked their rates to protect deposit base. However, some private sector banks, which had pre-empted deposit rate hikes, may have to come up with another round of hikes to attract retail depositors as their rates are only marginally higher than that of SBI. All in all, this signals a good time for depositors who were grappling with negative returns (adjusted for inflation) and may now see a positive real rate of return (assuming the inflation moderates from current levels).

Here we discuss some of the deposit options investors can consider to make improved returns.

The RBI, in 2010, continued its monetary tightening in order to rein inflation and in the process the effective policy rate has gone up by around 300 basis points. This rise in policy rates hadn't deterred banks till second half of the year, thanks to surplus deposit inflows the preceding year. However, the deposit growth waned and demand for credit started picking up subsequently.

While there have been three or four hikes in deposit rates by banks, these were only in the shorter maturities as the banks were expecting liquidity to ease by the year-end. However, with liquidity not easing sufficiently , certificate of deposit rates shot up to as high as 9.75 per cent. Hence, the deposit rate hikes to attract retail depositors.

Special deposits attractive

This time around, hikes were between one-year and three-year maturities. Additionally, the special deposit schemes are looking attractive.

For instance, SBI has hiked rate of interest (ROI) on its 555 days special deposit scheme by 175 basis points in the last four months to 9 per cent which gives a post-tax annualised yield of 8.1 per cent for a retail depositor (in the 10 per cent tax bracket). Such rates in term deposits were last seen in March 2009. Subsidiary State Bank of Patiala is offering 9.25 per cent ROI for the 555-day deposits. There are various attractive schemes from other banks — namely the 9 per cent, 400 day-scheme from City Union Bank; 9.5 per cent, 500-day scheme from Karur Vysya Bank; and 9 per cent, 500-day scheme from IDBI Bank (refer to table for other special deposit schemes).

For longer term investors , IDBI Bank has an attractive 1100-day deposit with 9.25 per cent ROI for a normal depositor and 10 per cent for senior citizens.

Other options

Corporate and non-banking financial companies' deposits are yet to get re-priced to reflect their rising cost of borrowings from banking sector. Sundaram Finance, after raising its deposit rates recently, has an 8.75 per cent rate of interest compounded quarterly on its one-year deposits. This cumulative option is relatively safer among NBFCs.

For investors looking for more than five years of fixed income options, the deposits begin to look attractive. With recent round of rate hikes, the five-year tax saving deposits has become more attractive than infrastructure bonds. For instance, the tax saver schemes of IDBI Bank and City Union Bank have interest of 8.5 per cent and 9 per cent as compared to 8 per cent rate of interest for a buyback option in IFCI Infrastructure Bonds. Therefore investors who haven't exhausted their 80 C are better off using these higher rates to lock-in, before considering 80 CCF option (Infrastructure bonds). There is also another long-term SBI retail bond issue on cards. With rising interest rates, NBFCs may also come up with NCD issuances as they did in 2009.

Outlook

In the weeks ahead, more banks are expected to hike deposit rates. Smaller banks may hike rates to make deposits a little more attractive than that of SBI.

The probable easing of liquidity pressures by the end of this March quarter and traditionally lower demand for credit in the June quarter will reduce the likelihood of more hikes in deposit rates. However, any threat from inflation will warrant further monetary tightening by the central bank, forcing banks to hike deposit rates.

Investors would be better off locking in to current levels as the deposit rate hikes may not be as steep from here on.

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