Investors in fixed deposits are in for good times. With State Bank of India, the country's largest bank, raising rates significantly today, market experts say this is just the beginning and one need not rush to invest in FDs aggressively.
While many banks raised deposit rates immediately after the Quarterly Review of Monetary Policy last month-end, the increase by SBI is quite sharp.
For instance, HDFC Bank raised rates for one-year and two-year deposits by 25 basis points to 7. 5 per cent and seven per cent, respectively. The biggest rise took place in deposits with a tenure of six months (75 basis points).
In comparison, SBI has raised rates between 25 and 150 basis points. The rate for the 15-45 day period has been increased from 2.50 per cent to four per cent -the biggest rise of 150 basis points.
For one year to less than two years, the rise is as high as 125 basis points - from six to 7.25 per cent. For 181 days to less than a year, the rate has been increased from 5.25 per cent to six per cent.
However, financial planners said the rate war could hot up soon. "Don't invest in FDs of more than one year. Also, don't invest the entire holding in a single FD," says Govind Pathak, director, Acorn Wealth.
He said one could invest in three-four FDs. For instance, if you have Rs 100,000, divide it into four deposits of Rs 25,000 each. In case interest rates increase in, say, the next quarter, you could take out the money from two deposits and invest in another higher-paying FDs.
Rising deposit rates give a clear indication that lending rates will also rise. According to market experts, banks have been reluctant to increase lending rates because retail lending has not taken off. Many said even teaser rates could go sooner than later.
At present, SBI is offering a teaser rate of eight per cent for the first year and nine per cent for second and third years.
Then, the rate will be linked to the base rate. Similarly, HDFC is offering 8.25 per cent in the first year and 9.25 per cent in the second year. After that, the rate will be linked to the retail prime lending rate.
Experts say a home buyer need not rush to opt for teaser rates, especially for buying an under-construction property.
"Potential home buyers need not rush to take that home loan, whether it's a teaser rate or not, simply because it is a 15-20 year decision," says Kartik Jhaveri, director, Transcend India.
He feels unless one is buying a ready to possess property, it may not be a great idea to go for teaser rate schemes.
This is because if you buy an under-construction property under a teaser rate scheme, your EMI or interest payment will start now.
When the loan is disbursed entirely in the next two-three years, the teaser rate may no longer apply.
"You will be stuck with the conditions of the teaser rate scheme that may be adverse compared to the base rate regime," adds Jhaveri.
<B>Floating rate fixed deposits: Good in a rising interest regime</B>
SBI's new product - floating rate term deposit linked to the base rate - is a novel one. But experts are divided whether retail investors should get into these products or not.
"The basic reason for investing in a fixed deposit is assured returns. Any product that does not give assured returns is not meant for small investors," says Suresh Sadagopan, a certified financial planner.
Pathak, director, Acorn Wealth, says one could look at the product, but only for one to two years.
His argument: Since interest rates are going to rise for some time, it makes sense to be in these products. "In a falling-rate regime, these may not make much sense," says Pathak.
SBI is offering a floating rate of seven, 7.25 and 7.5 per cent for one, two and three years, respectively. Housing Development Finance Corporation has two such products - a regular product for individuals and a systematic savings plan.
The former offers 6.9-8.25 per cent for different tenures. The latter, launched six months back, allows people to invest in parts, just like a recurring deposit. You could invest as little as Rs 2,000 to as much as Rs 50,000 for 24 to 60 months. The rates vary from 7.25 to eight per cent (two-five years). Indian Overseas Bank introduced such a product last year.
