Pradeep Gaur/Mint
Pradeep Gaur/Mint

Term deposits of up to `1 crore turn attractive

Some banks have increased their rates for select maturities, others may take a call soon

Most big banks have increased their lending as well as deposit rates after the monetary policy on 29 October. State Bank of India (SBI) and HDFC Bank Ltd increased their base rate to 10% from 9.80%. Meanwhile, banks including SBI, Oriental Bank of Commerce (OBC), Allahabad Bank and Axis Bank Ltd have raised fixed deposits rates in the range of 20-120 basis points (bps). One basis point is one-hundredth of a percentage point. We take a look at why banks have raised rates and what you should do in terms of investments.

New lending and deposit rates

SBI’s increased base rate will be effective 7 November. The bank also raised its prime lending rate by 20 bps to 14.75% from 14.55%. HDFC Bank’s new base rate is effective 2 November, according to a notification on its website.

Meanwhile, some banks have increased their deposit rates for select maturities and term deposits up to 1 crore have seen quite a few changes. For instance, effective 1 November, SBI has raised interest rate from 6.80% to 7.00% which mature in 180-210 days. OBC has raised term deposit rates for 91-179 days maturity to 8.75% from 8.50%; interest rate on term deposits between 180 days and 365 days is now 9.00% from 8.50% earlier. Axis Bank raised rates for deposits of one-year to 15-month maturities by 25 bps. Allahabad Bank revised interest rate for domestic term deposits of different maturities from 4 November, the bank stated on its website; interest rates on deposits that mature in three years to less than five years have been raised from 8.75% to 9.05%. Also, interest rate of deposits that mature between 30 days and 269 days has been increased between 20 bps and 50 bps by Allahabad Bank.

Why are rates going up?

After the monetary policy announcement, liquidity in the system has improved for the short term. For medium and long term, liquidity continues to be tight. Inflation and liquidity play a key role in deciding the change in rates. “The increase in base rate is a post Reserve Bank of India announcement measure. Banks have increased rates to protect the overall profitability," said Vishal Narnolia, banking analyst, SMC Global Securities Ltd. On being asked if other banks will follow suit, he said that others won’t simply look at SBI and follow. “They will either have to take a hit on the margins or lose competitive edge—a call which banks have to take," he added.

What should you do?

“If you are in need to borrow, compare rates available in the market. For depositors, it is a positive as you can now lock in at higher rates," said Suresh Sadagopan, a Mumbai-based financial planner. If you plan to invest for the short term, compare rates with other short-term market instruments too. But if safety is high on your agenda, stick to fixed deposits.