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Liquidity squeeze: Short-term fixed deposits draw investors

CP, CD rates also rise, making fixed maturity plans attractive

Neelasri Barman  |  Mumbai 

With the Reserve Bank of India (RBI)’s steps to arrest the slide of the rupee leading to tight conditions, the retail investor is once again being drawn to short-term bank (tenures of less than a year).

In the past few weeks, lenders such as HDFC Bank and YES Bank have raised on select maturities and it is expected would follow in the near future.

The banks had mostly raised rates for maturities in the range of 30 days to a year. For instance, HDFC Bank is offering interest of 8.5 per cent for maturities of 46-60 days; senior citizens are entitled to nine per cent. The bank has also raised interest for a few 46-90-day maturities, effective July 27.

“It is indeed a good time for investors to lock in money in bank So far, we have not increased our rates in retail We shall take a call in a few weeks,” said B A Prabhakar, chairman and managing director, Andhra Bank.

Rates for short-term instruments such as commercial paper (CP) and certificates of deposit (CD) also rose, making fixed maturity plans (FMPs) attractive. FMPs primarily invest in CDs and CP. Though returns from FMPs of maturities below a year are equally attractive, the risk is higher.

“The tax treatment for bank fixed deposits, as well as FMPs, of up to 12 months is nearly the same. But FMPs do not come with a guaranteed rate of returns, while bank do,” said Arvind Rao, chief planner at Dreamz Infinite Financial Planners. According to certified financial planner Jayant Pai, bank are insured by the government to the extent of Rs 1 lakh and investors get to know of the returns upfront.

However, in the case of FMPs, they have to seek various details such as the instrument they’re investing in and the indicative yield.

Experts say banks that have raised fixed deposit rates recently might not raise these further in the near term.

“I do not see much upside in bank fixed deposit rates from here because may reverse the liquidity-tightening moves once the rupee stabilises against the dollar,” said Suresh Sadagopan, founder of Ladder7 Financial Advisories.

data shows bank deposits rose 13.4 per cent during the fortnight ended July 26. For this financial year, RBI’s deposit growth estimate is 15 per cent.

First Published: Tue, August 13 2013. 00:50 IST