Mumbai: If you have taken a loan this year, it would have been an expensive deal for you. And had you put money in fixed deposits, your returns would have been higher than last year. Year 2018 has not been good for the borrowers with major banks and non-banking finance companies (NBFC) consistently increasing interest rates on home loans, car loans and personal loans. However, the year remained attractive for depositors as banks raised fixed deposit rates by 15-80 basis points (bps) in 2018. One basis point is one-hundredth of a percentage point.

Fixed deposits rates rose

Since the beginning of the year, banks have increased fixed deposit rates across maturity basket. For instance, State Bank of India (SBI), the country’s largest lender, increased FD rates for one-year tenure at least four times this year. According to bankers, the big theme for current year was liquidity coverage ratio (LCR) for banks. “Most banks that are well capitalized have been seeing strong credit growth. Hence, there is an increased focus on retail fixed deposit during the course of the year. There is a renewed focus on pushing for both CASA (current account savings account) and term deposits," said Rajiv Anand, executive director, Axis Bank Ltd. Global and domestic factors led banks to increase deposit rates. “Towards the end of financial year 2017-18, the interest rate was going downwards giving the general sense that interest rate would drop further. The three factors against the liquidity in the local market were: skyrocketing global oil prices, trade war between the US and China and the recent NBFC liquidity scare. Since RBI was unable to give a relief, all the financial institutions were starving for liquidity. For financial institutions, the best available route for liquidity was term deposits. Depending on the need for money, banks increased term deposit rates," said Virat Diwanji, president–retail liabilities and branch banking, Kotak Mahindra Bank Ltd.

Loans got expensive

As the interest rate cycle turned in 2018, home loans, car loans and personal loans got expensive.

For the first time in four year, the Reserve Bank of India (RBI) increased policy rates in 2018. From the beginning of 2018, the interest rate on home loans started to rise.

For instance, State Bank of India, the country’s largest lender, increased its one-year marginal cost of fund based lending rate (MCLR) four times till November this year. One -year MCLR is the benchmark rate on which most banks lend money to the consumers. “The big point on lending side has been that the rates have gone up. I expect rates could go up a little bit more on the lending and deposit," said Anand.

What it means for you

If you are planning to invest your money in bank fixed deposit you should compare the rates across banks and tenure. Most banks are now offering interest around 6.70-7% on one-year fixed deposits. However, small finance banks offer higher interest rate than private banks and public sector banks currently. In case you are planning to take a home loan, in a higher interest rate regime opt for floating rate loan. Remember that all home loans usually come with a spread on MCLR. If you have a good credit score you can negotiate the spread on your home loans, processing charges and administrative costs. If you are an existing borrower and want to switch your home loan to a lender who is offering cheaper loans, check for the total cost of transfer before switching your loan.