Get locked into FDs

With banks likely to cut rates, investing in a product that offers 8-9% annually will be beneficial

This could be the right time to get locked into fixed deposits (FDs), especially for risk-averse investors. With the Reserve Bank of India (RBI) cutting the repo rate by 25 basis points (bps) to 7.5 per cent, banks could follow suit and cut deposit rates.

Some banks have already started. On Tuesday, UCO Bank cut rates on bulk deposits by 50 bps. Earlier this month, IDBI Bank had cut rates on deposits of some maturities by 25 bps.

“March being the financial year-end, banks typically offer higher interest rates, especially on bulk deposits to large corporate customers. But now it is possible that banks may not renew such deposits at higher rates if there is not much demand,” said C V Rajendran, chairman and managing director, Andhra Bank. “Given an option I would like to cut rates immediately. But since it is the year-end I can say that a rate cut looks definite in April.”

RBI last cut repo rates by 25 bps in January. But not many banks had followed it up with a cut in interest rates for either loans or deposits. According to Feroze Azeez, director and head, Investment Products, Anand Rathi Private Wealth, historically banks follow up with a rate cut only after a series of three rate cuts by the central bank. “So, depositors in the lower tax bracket should utilise the window available for bank FDs now because later on, banks might cut deposit rates more steeply,” he said.

Currently, banks offer eight-nine per cent on one-year bank FDs. Given the lower interest rate scenario, rates on tax-free infrastructure bonds are also likely to come down. However, depositors in the highest tax-bracket should wait for those (as has been announced by the finance minister in the Budget). “For someone in the 30 per cent tax bracket, a tax-free bond that offers 7.5 per cent return, the effective yield post-tax yield works out to 11.33 per cent. So, it makes sense to wait for tax-free bonds,’’ says Azeez.

However, keep in mind that in 2015-16 tax-free bonds will not offer as high rates as they did in 2012-13, said Jyoteesh Kumar, executive vice-president, HDFC Securities. Hence, for senior citizens, who are risk-averse and looking to earn interest income from their deposits, bank FDs are a good option now.

Senior citizens can also look at company deposits as they offer 50-100 bps higher returns than bank deposits, says Abhishake Mathur, head-Financial Planning Services, ICICI Securities. “Some companies offer specific schemes for senior citizens also. But you must remember to diversify and not put all your money in one company's deposits,” he said.

Investors can also look at debt funds as these will benefit from measures announced in the Budget and rate cuts, said Vidya Bala, head of mutual fund research, FundsIndia.com. The funding situation for companies is likely to ease in the medium term, which could lead to a re-rating of corporate bonds. “The next couple of years could offer dual opportunity in the debt space — capital appreciation from easing yields and credit opportunity from improved corporate fortunes,” she said. So, fixed maturity plans and medium-to-long-term debt funds, such as income or dynamic bond funds, are also good options.