Term deposits grow faster as investors see safety in returns

Term deposits grow faster as investors see safety in returns
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First Published: Tue, Mar 20 2007. 12 07 AM IST
Updated: Tue, Mar 20 2007. 12 07 AM IST
Mumbai: Faced with turbulent stock markets and uncertain returns, investors are starting to give up flexibility on their cash holdings in order to maximize returns.
As a result, term deposits with banks have started growing at a faster pace while there has been a slowing down in the growth of demand deposits.
Term deposits are illiquid deposits and can be redeemed only after a fixed tenure while a depositor can withdraw demand deposits at any given point of time.
Savings accounts and current accounts comprise demand deposits while term deposits are those that have a fixed maturity which can vary between one month and five years.
Banks pay 3.5% interest rate on savings account and no interest is paid on current accounts. Interest rate on term deposits now vary between 7% and 11%, depending on their maturity.
The latest data of the Reserve Bank of India shows that as on 2 March, year-on-year growth in demand deposits has been 19.4% while term deposits grew by 23.9%. In the previous year, demand deposits grew by 28.2% and term deposits grew by 14.2%.
“There is a distinct change in the trajectory of deposit growth. It shows that those who have money are locking themselves in for a longer period and they do not want money on call,” said a senior banker.
There are two reasons behind this phenomenon. With banks offering higher deposit rates for term deposit, more and more people are willing to lock in their money for a longer period.
But more importantly, with the stock market turning volatile, savers no longer want to stay liquid and look for an opportunity to invest in markets.
“This has been happening. In fact, we hear that people are withdrawing money from central government’s small savings schemes and putting it in term deposits of banks. Both rising deposit rates and volatility in stock market are contributing to this,” says A. Prasanna, a senior analyst with ICICI Securities, a bond house.
The Bombay Stock Exchange’s benchmark index Sensex, which closed at its lifetime high of 14,652.09 on 8 February, has since then lost 13.69%. It closed at 12,644.99 on Monday.
A 90-day bank deposit is now getting as much as 10% interest. Returns from a typical small-savings instrument is around 8%.
Bankers expect the deposit rates to go up further as the Reserve Bank of India, the country’s central bank, is not yet through with its monetary policy-tightening cycle. Last week, Bank of Baroda chairman A.K. Khandelwal said bank deposits could go up by another one to two percentage points.
Till 2 March, on a year-on-year basis, Indian banking system’s deposit base grew by Rs4,95,230 crore. The growth in term deposit has been Rs4,27,612 crore and that of demand deposit Rs64,619 crore.
In contrast, last year, the overall deposit base grew by Rs2,93,446 crore. Out of this, term-deposit growth was Rs2,18,581 crore while demand deposit grew by Rs74,865 crore.
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First Published: Tue, Mar 20 2007. 12 07 AM IST
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