Move fixed deposits only if the rate difference is high. Here's why

With banks signalling a rise in rates, it is good news for the depositor

Since the last few months, interest rates have been going up. The country’s largest bank, State Bank of India, signalled this rise as early as in February by increasing both its deposit and lending rates. ICICI Bank and Punjab National Bank followed SBI's move. Now, HDFC Banks has also decided to raise deposit rates by as much as 100 basis points. 

At present, SBI’s deposit rate for one year stands at 6.40 per cent whereas HDFC Bank is at 6.85 per cent. And between three years and five years, SBI is offering 6.7 per cent whereas HDFC Bank is offering 7 per cent. So the deposit rate difference between the country’s largest public sector and private sector banks is around 30 to 40 basis points.  

So what does it mean for the depositor? Say, you deposited Rs 500,000 for five years at the rate of 7 per cent a year. At the end of five years, the amount you will get it Rs 708, 812. Now, if the interest rate goes up by 100 basis points, the returns would increase to 744, 922 – a difference of Rs 36,000. 

Over a five-year period, this is a substantial difference. But if the next bank is offering only 30-40 points more, how do the numbers look? For the same amount invested at say, 6.7 per cent for five years, the maturity amount would be Rs 698, 319 and at 7.1 per cent, the amount would be Rs 712, 344 – just Rs 14,025 more over a 60-month period. For a smaller tenure, the difference in returns would be much lower.    

For most retail investors, this difference isn’t substantial. However, this is also a good time to stay nimble. Meaning invest in shorter-tenure fixed deposits so that if there are better opportunities when rates rise, one can shift quickly across tenures or from one bank to another.